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RAILROAD  TRANSPORTATION 


ITS  HISTORY  AND  ITS  LAWS 


BY 


ARTHUR  T.  HADLEY 


COMMISSIONER  OF  LABOR  STATISTICS  OF  THE  STATE  OF  CONNECTICUT 
INSTRUCTOR  IN  POLITICAL  SCIENCE  IN  YALE  COLLEGE 


0 


college 


■CHKSTlSUaUlWL 


HASS* 


NEW  YORK  AND  LONDON 


G.  P.  PUTNAM’S  SONS 
}z  JimckerliDcher  $xm 
1886 


COPYRIGHT  BY 

G.  P.  PUTNAM’S  SONS 

1885 


Press  of 

G.  P.  Putnam’s  Sons 
New  York 


PREFACE. 


This  book  deals  with  those  questions  of  railroad  his¬ 
tory  and  management  which  have  become  matters  of 
public  concern.  It  aims  to  do  two  things  :  first,  to  pre¬ 
sent  clearly  the  more  important  facts  of  American  rail¬ 
road  business,  and  explain  the  principles  involved  ;  second, 
to  compare  the  railroad  legislation  of  different  countries, 
and  the  results  achieved. 

The  two  things  need  to  be  viewed  in  connection  with 
one  another.  The  attempt  to  manage  railroads  without 
regard  to  the  demands  of  public  policy,  or  to  legislate 
concerning  railroads  without  regard  to  the  necessities  of 
railroad  business,  results  in  disastrous  failure.  This  fact 
has  been  gradually  recognized  by  thoughtful  men  on  both 
sides.  But  it  has  been  hard  to  get  any  comprehensive 
view  of  the  subject  in  its  different  aspects.  The  brilliant 
book  of  C.  F.  Adams,  Jr.,  stands  almost  alone;  and  even 
this  treats  of  but  a  few  questions  among  many.  The  man 
who  would  really  study  the  subject,  must  seek  his  material 
among  hundreds  of  different  arguments  and  reports; 
many  of  them  extremely  able,  but  few  of  them  easy  of 
access,  and  still  fewer  at  all  complete  in  themselves. 

It  was  to  meet  this  want  that  the  author  first  under¬ 
took  to  deliver  a  course  of.  lectures  on  Railroads  and  the 
Social  Problems  connected  with  them.  Part  of  the  ma¬ 
terial  of  these  lectures  is  here  presented  to  the  public. 

One  of  the  pleasantest  things  in  the  whole  work  has  been 


IV 


PREFA  CE. 


the  cordial  help  which  the  author  has  uniformly  received 
from  men,  in  all  positions,  to  whom  he  has  had  occasion 
to  apply  for  information.  Special  acknowledgments  are 
due  to  Mr.  S.  Wright  Dunning,  of  The  Railroad  Gazette, 
for  constant  suggestions  with  regard  to  the  work,  as  well 
as  for  the  ready  permission  to  use  material  which  has 
appeared,  both  signed  and  unsigned,  in  the  columns  of  his 
journal. 


New  Haven,  Conn.,  Oct.  i,  1885. 


CONTENTS. 


CHAPTER 

I. — The  Modern  Transportation  System  . 

II. — The  Growth  of  United  States  Internal  Com¬ 
merce  . * 

III.  — Railroad  Ownership  and  Railroad  Speculation, 

IV.  — Competition  and  Combination  in  Theory  . 

V. — Competition  and  Combination  in  Practice  . 

VI. — Railroad  Charges  and  Discriminations 

VII. — Railroad  Legislation  in  the  United  States  . 

VIII. — The  English  Railroad  System  .  .  .  . 

IX. — English  Railroad  Legislation  . 

X. — Railroad  Policy  in  France  . 

XI. — The  Railroad  Systems  of  Central  Europe  . 

XII. — Railroad  Legislation  in  Italy  . 

XIII. — Results  of  State  Railroad  Management 

Appendix . 

Index  .......... 


PAGE 

I 

24 

40 

63 

82 

100 

I25 

146 

163 

187 

203 

219 

236 

259 

267 


RAILROAD  TRANSPORTATION: 
ITS  HISTORY  AND  ITS  LAWS. 


CHAPTER  I. 

THE  MODERN  TRANSPORTATION  SYSTEM. 

Its  importance  in  history — Growth  of  the  postal  service — The  telegraph — 
Merchant  shipping — Substitution  of  steam  for  sail — Invention  of  rail¬ 
roads — Misunderstanding  as  to  their  real  character  and  uses — Changes 
since  1850 — Consolidation — Railroad  extension — Development  of  busi¬ 
ness — Reduction  of  rates — Widened  field  for  speculation — Growth  of 
large  cities  and  large  establishments — Discrimination — Jealousy  of  rail¬ 
road  power — Characteristics  of  railroad  legislation  since  1870. 

A.  de  Foville :  “  De  la  Transformation  des  Moyens  de  Transport.” 
Paris,  1880. 

E.  Sax  :  “  Die  Verkehrsmittel  in  Yolks-  und  Staatswirthschaft.”  Vienna, 
1878. 

F.  X.  v.  Neumann-Spallart :  “  Uebersichten  der  Weltwirthschaft,  Jahr- 
gang  1881-2.”  Stuttgart,  1884. 

On  the  fourth  of  July,  1828.  Charles  Carroll,  last  sur¬ 
viving  signer  of  the  Declaration  of  Independence,  laid  the 
first  rail  of  the  galtimore  and  Qhio  Railroad.  One  man’s 
life  formed  the  connecting  link  between  the  political 
revolution  of  the  last  century  and  the  industrial  revolu¬ 
tion  of  the  present. 

The  second  reaches  wider  and  deeper  than  the  first. 
Yet  there  are  few  who  realize  its  full  importance,  or  who 
seriously  try  to  understand  it.  A  new  system  of  com- 


RAILROAD  TRANSPORTATION. 


2 

mercial  and  social  relations  has  arisen  among  us.  Small 
industries  and  independent  workmen  are  giving  place  to 
large  factories  and  factory  operatives.  We  no  longer 
produce  for  the  home  market,  but  for  the  world’s  markets. 
A  rapidly  increasing  share  of  productive  wealth  is  held 
by  corporations.  The  men  who  manage  this  mass  of 
corporate  capital  form  the  sole  connecting  link  between 
investors,  workmen,  and  consumers.  The  classes  become 
more  and  more  sharply  marked.  Conflicts  of  interest 
arise  between  them — sometimes  apparent,  sometimes  real, 
— which  result  in  disastrous  struggles  or  in  class  legisla¬ 
tion  of  the  worst  type.  Yet  the  majority  of  men  seem 
indifferent  to  the  real  importance  of  these  events.  Occa¬ 
sionally  they  make  feeble  efforts  to  resist  them.  More 
often  they  allow  themselves  to  be  hurried  on  in  the  gen¬ 
eral  movement,  without  even  trying  to  understand  what 
it  means  or  whither  it  is  leading. 

Of  these  changes  the  railroad  is  at  once  an  instrument 
and  an  example.  As  a  carrier,  it  furnishes  the  means 
which  has  made  modern  business  methods  possible.  As 
an  organization,  it  furnishes  in  itself  an  extreme  type  of 
those  methods.  No  one  symptom,  in  business  or  in  poli¬ 
tics,  marks  the  direction  of  national  activity  so  clearly  as 
does  the  way  in  which  the  transportation  system  is  organ¬ 
ized  and  controlled.1 

This  last  fact  is  by  no  means  confined  to  modern  his¬ 
tory.  The  greatness  of  ancient  Rome  had  no  more  char¬ 
acteristic  monument  than  her  system  of  military  roads. 
With  the  fall  of  the  Roman  Empire  the  roads  fell  into 
decay ;  and  distant  communication  on  a  large  scale  was 
first  revived  by  a  league  of  independent  towns,  which, 
from  the  thirteenth  to  the  fifteenth  century,  controlled 


1  M.  M.  v.  Weber  :  “  Nationalist  und  Eisenbahnpolitik.”  Vienna,  1876. 


THE  MODERN  TRANSPORTATION  SYSTEM. 


3 


the  commerce  of  Northern  Europe  on  water  and  on  land. 
The  history  of  this  Hanseatic  League,  extending  from 
Norway  to  Belgium,  from  London  to  the  heart  of  Russia, 
is  one  of  the  most  striking  illustrations  of  the  political 
system  of  the  Middle  Ages.  With  a  change  of  political 
system  the  transportation  system  changed  also.  One  of 
the  first  steps  of  Louis  XI.  of  France,  in  his  efforts  to 
create  a  national  power  and  national  life,  was  to  take  the 
postal  service  out  of  the  hands  of  the  cities  or  other  feudal 
authorities  and  make  it  a  matter  of  national  administra¬ 
tion.  Modern  history — the  history  of  nations  as  such — 
may  almost  be  said  to  have  begun  at  this  point. 

Two  or  three  centuries  later,  France  obtained  a  national 
system  of  roads  and  canals.  The  idea  was  largely  due  to 
Colbert,  the  minister  of  Louis  XIV.  It  was  not  executed 
in  detail  till  the  middle  of  the  last  century.  Many  abuses 
grew  up  in  connection  with  it ;  but  on  the  whole  it  was 
probably  the  soundest  and  most  efficient  part  of  the 
French  administration.  A  system  of  lines  of  communica¬ 
tion,  radiating  from  Paris,  was  constructed  by  skilled 
engineers,  and  placed  under  the  supervision  of  men  of 
talent,  specially  trained  for  the  purpose  at  the  Ecole  des 
Ponts  et  Chaussees.  The  whole  arrangement  was  further 
improved  by  Napoleon,  and  has  served  as  a  basis  for  the 
present  system  of  railroad  supervision. 

In  no  other  country  was  the  same  completeness  of  or¬ 
ganization  possible.  In  England  there  was  no  such 
organization  at  all.  The  roads  were  cared  for — and  badly 
cared  for — by  local  authorities.  Through  communication 
was  established,  not  by  government,  but  by  private  en¬ 
terprise.  Turnpikes  were  first  constructed  at  the  begin¬ 
ning  of  the  last  century.  The  first  great  English  canal 
was  built  in  1 76 q.  The  next  forty  years  was  a  period 


4 


RAILROAD  TRANSPORTATION. 


of  great  activity  in  canal  building ;  but  it  was  left  to 
private  enterprise,  with  little  or  no  government  inter¬ 
ference.1 

While  England  was  thus  far  behind  in  the  matter  of 
land  communication,  on  the  sea  she  took  the  lead  in  a 
policy  of  her  own.  The  Navigation  Act  of  16^1,  denying 
foreign  vessels  the  right  to  carry  to  or  from  England  the 
commerce  of  any  country  but  their  own,  was  in  every 
sense  a  national  measure.  It  was  a  systematic  attempt  to 
advance  the  shipping  interests  of  England  at  the  expense 
of  those  of  other  states.  It  bore  the  stamp  of  English* 
character  in  every  line.  By  crippling  the  commerce  of 
Holland,  it  gave  England  her  supremacy  on  the  sea.  It 
was  imitated  by  other  nations  in  the  vain  hope  of  produ¬ 
cing  similar  results.  It  continued  in  force  for  nearly  two 
centuries  ;  being  regarded  as  the  bulwark  of  England’s 
maritime  power,  when  really  it  had  ceased  to  be  of  any 
service  to  her  shipowners,  and  had  become  an  intolerable 
nuisance  to  her  merchants.2 

These  matters  of  transportation  policy  in  past  centuries 
are  chiefly  important  as  illustrating  the  drift  of  the  gen¬ 
eral  history  of  the  time.  In  itself  the  transportation 
business  was  small.  The  movement  of  goods  in  a  year 
on  all  the  through  routes  of  the  world  a  century  ago 
would  not  equal  the  movement  on  a  single  one  of  our 
trunk-lines  of  railroad  at  the  present  day.  Transporta¬ 
tion  policy  was  but  a  straw  showing  the  direction  of  the 
political  wind.  To-day  all  this  has  changed.  Transporta¬ 
tion  has  not  merely  become  important  in  itself,  it  has  be¬ 
come  a  controlling  factor  which  gives  shape  to  each 

1  Gustav  Cohn  :  “  Untersuchungen  iiber  die  Englische  Eisenbahnpolitik.’' 
Leipzig,  1874.  Vol.  i.,  pp.  11-16. 

SW.  S.  Lindsay:  “  History  of  Merchant  Shipping.”  London,  1874-76. 
Vol.  iii. ,  p^.  53-286. 


THE  MODERN  TRANSPORTATION  SYSTEM. 


5 


man’s  private  business,  and  to  the  public  policy  of  every 
civilized  nation. 

All  this  has  grown  up  within  a  century  ;  nearly  all, 
within  half  a  century.  The  opening  of  canals,  and  the 
development  of  river  navigation,  mark  the  beginning  of 
the  change  :  but  it  was  only  a  beginning.  The  canal 
system  of  America  was  fairly  well  developed  fifty  years 
ago  ;  that  of  Europe  still  more  completely  so.  Yet  it  is 
astonishing  to  find  how  little  long-distance  communication 
there  had  been  up  to  that  time.  It  was  not  until  1833 
that  a  daily  mail  was  established  between  London  and 
Paris.  Even  after  that,  there  was  communication  with 
the  other  parts  of  the  continent  only  twice  a  week.  The 
English  charge  on  foreign  letters,  apart  from  the  ship’s 
postage  and  the  expense  in  foreign  countries,  varied  from 
twenty-eight  to  eighty-four  cents.  The  inland  communi¬ 
cation  was  more  frequent,  but  the  charges  were  exorbitant, 
averaging  about  twenty  cents  per  sheet.  No  wonder  that 
a  vast  deal  of  private  letter  conveyance  was  done,  in  defi¬ 
ance  of  the  government  monopoly.  In  the  years  1834-5 
the  pressure  in  favor  of  low  rates  began  to  make  itself  felt. 
The  movement  was  headed  by  Rowland  Hill,  whose  work 
on  “  Postal  Reform,  its  Importance  and  Practicability  ”  ap¬ 
peared  in  1837.  His  proposal  to  reduce  inland  postage 
to  one-tenth  its  former  figure  was  so  sweeping  as  to 
create  a  great  sensation,  and  not  a  little  opposition ;  but 
the  idea  was  carried  out  in  1840,  postage  stamps  being  in¬ 
troduced  at  the  same  time.  The  financial  results  did  not,  at 
first,  meet  the  more  sanguine  expectations ;  but  the  so¬ 
cial  effects  far  outweighed  any  temporary  financial  loss. 

The  example  thus  set  by  England  was  soon  followed 
by  other  civilized  nations.  The  first  changes  in  the  United 
States  were  made  in  1845.  The  previous  rates  had  been 


6 


RAILROAD  TRANSPORTATION. 


from  six  to  twenty-five  cents,  according  to  distance.  They 
were  now  reduced  to  five  or  ten  cents ;  and  soon  after¬ 
wards  (l8$l,  1855)  in  general  to  three  cents.  The  same 
policy  was  followed  throughout  Europe  at  almost  the 
same  time.  With  lower  rates  came  better  service  and 
better  facilities.  In  the  year  1851  these  reforms  were 
tolerably  complete  as  far  as  concerned  national  postage  of 
the  leading  countries ;  and  by  a  series  of  postal  treaties 
they  were  rapidly  extended  to  international  correspond¬ 
ence  within  Europe  itself.  In  the  ocean  postal  service 
the  high  rates  continued  much  longer.  The  attempt  to 
subsidize  steamship  lines  led  to  an  attempt  to  tax  the 
letters  carried  by  those  steamships.  England  was  thus 
for  a  long  time  actively  opposed  to  the  lowering  of 
ocean  postage  rates;  the  United  States  did  not  take 
strong  ground  in  its  favor  until  after  the  abandonment  of 
the  Collins  line  subsidy  in  1858.  From  that  time  forward 
there  was  a  steady  lowering  of  rates,  culminating  in  the 
establishment  of  the  Postal  Union  in  1874-5,  with  its 
uniform  rate  of  five  cents  per  half  3unce  between  a  num¬ 
ber  of  countries  on  both  sides  of  the  Atlantic.  This 
Union  was  more  closely  organized  in  1879;  anc*  it  has 
gradually  come  to  include  the  whole  civilized  world. 
The  statistics  of  the  Union  show  that  the  total  number 
of  letters  and  packages  delivered  by  mail  now  amounts  to 
10,000,000,000  annually.1 

In  the  same  year  (1837)  with  the  appearance  of  Row¬ 
land  Hill’s  proposals  for  cheap  postage,  the  electric  tele¬ 
graph2  was  first  patented.  Four  distinct  patents  were 

1  For  details,  see  Neumann-Spallart  :  “  Uebersichten,”  389-398. 

3  De  Foville,  pp.  203-205.  For  detailed  statistics  on  the  telegraph  see 
Neumann-Spallart,  399-413  ;  “  Tenth  Census  of  the  U.  S.”  (1880),  vol. 
iv.,  pp.  804-849  (numbers  at  the  bottom  of  page).  The  latest  authority  on 
the  telegraph  in  its  industrial  or  political  aspect  is  Schbttle  :  “  Der  Tele¬ 
graph  in  administrativer  und  finanzieller  Hinsicht.”  Stuttgart,  1883. 


THE  MODERN  TRANSPORTATION  SYSTEM. 


7 


issued  almost  simultaneously.  The  first  working  line 
seems  to  have  been  established  in  England  about  1839. 
The  U.  S.  Government  enabled  Prof.  Morse  to  construct 
the  first  American  telegraph — between  Baltimore  and 
Washington — in  1844.  The  attempt  was  made  in  many 
countries  of  continental  Europe  to  confine  the  use  of  the 
telegraph  to  the  government,  and  not  allow  private  indi¬ 
viduals  to  send  messages.  But  this  was  too  much  against 
the  spirit  of  the  age  to  be  carried  out  successfully ;  and 
while  the  governments  retained  their  monopoly  of  tele¬ 
graph  ownership,  they  were  obliged  to  give  up  the  attempt 
to  monopolize  its  use.  The  telegraph  service  of  Germany 
and  Austria  dates  fromj849;  that  of  France  from  1851. 
Telegraphic  communication  between  Europe  and  America, 
which  had  been  held  for  about  a  month  in  1858,  was  first 
permanently  secured  in  1865.  Technical  improvements 
and  inventions  have  followed  one  another  in  such  rapid 
succession  in  recent  years  that  we  cannot  even  enumerate 
them  ;  nor  can  we  give  any  history  of  the  telephone,  the 
most  important  of  them  all.  There  are  now  about  600,000 
miles  of  telegraph  line,  with  at  least  1,600,000  miles  of 
wire  ;  an  increase  of  some  50  per  cent,  in  ten  years.  The 
total  number  of  messages  of  all  kinds  cannot  fall  far  short 
of  200,000,000  annually. 

Of  scarcely  less  importance  has  been  the  development 
of  merchant  shipping.  The  nominal  tonnage  of  the 
world’s  marine  has  increased  from  about  $ ,000,000  in  1830 
to  20,000,000  in  1880  1 — 300  per  cent  in  fifty  years.  But 
the  increase  in  effective  carrying  power  was  far  greater 
than  these  figures  would  indicate.  The  effectiveness  de- 


1  These  figures,  especially  for  the  earlier  date,  can  only  be  roughly  given, 
and  authorities  differ  widely.  For  more  careful  attempts  at  computation, 
on  a  somewhat  different  basis,  see  Kiaer  :  “  Statistique  Internationale  de  la 
Navigation  Maritime.”  Christiania,  1881. 


■ 


8  .  RAILROAD  TRANSPORTATION. 

pends  not  only  upon  the  tonnage  but  also  upon  the 
vapidity  of  movement  ;  and  this  was  fast  increasing.  A 
part  of  the  increase  was  due  to  improvements  in  build  ;  a 
part  to  improved  methods  of  handling  freight.  A  part 
was  due  to  the  opening  of  new  lines  of  communication, 
like  the  Suez  Canal.  A  part — and  by  no  means  a  small 
one — was  due  to  the  study  of  the  prevailing  winds,  first 
taken  up  on  a  large  scale  by  Lieut.  Maury  some  forty 
years  ago.  It  was  found  that  the  winds  had  a  certain 
regularity  even  in  those  parts  of  the  ocean  where  they 
seemed  to  blow  quite  irregularly.  By  taking,  not  the 
shortest  course,  but  a  course  where  the  winds  are  likely  to 
be  favorable,  the  average  duration  of  the  voyage  on  many 
routes  was  shortened  thirty  or  forty  per  cent.  > 

But  the  most  radical  change  was  made  by  the  gradual 
substitution  of  steam  for  sail  as  a  mode  of  propulsion.1 
The  practical  usefulness  of  the  invention  dates  from  the  ^ 

early  years  of  the  present  century.2  It  was  long  after  it 
had  been  employed  on  inland  waters  or  in  the  coasting 
trade  before  it  was  supposed  possible  that  it  could  com-  • 
pete  with  sail  on  ocean  routes.  The  first  efforts  of  Eng¬ 
land  to  secure  ocean  steamship  lines  were  the  result  of  * 

political  rather  than  business*  considerations.  But  what 
seemed  a  hazardous  experiment  in  1838  was  a  proved 
success  in  1850.  There  was  a  hard  fight  beginning  be¬ 
tween  steam  and  sail ;  each  new  invention  gave  steam  a 
new  advantage.  The  substitution  of  the  screw  for  the 
side-wheel  and  the  introduction  of  compound  engines 
economized  force  and  fuel.  The  attempts  to  use  sailing 
vessels  with  auxiliary  screw  were  not  very  successful. 

The  increase  in  the  size  of  vessels  gave  steamers  a  relative 

1  Lindsay  :  “  History  of  Merchant  Shipping,”  vol.  iv. 

3  “  Tenth  Census  of  the  U.  S.,”  iv.,  649-652. 


THE  MODERN  TRANSPORTATION  SYSTEM. 


9 


advantage ;  for,  while  it  somewhat  increased  the  con¬ 
sumption  of  fuel,  it  increased  the  carrying  capacity  much 
faster.  There  are  now  steamships  which  burn  but  half  an 
ounce  of  coal  per  ton  of  cargo  per  mile.  The  rather 
questionable  device  of  water  ballast  and  the  rise  of  the 
“  ocean  tramp  ” — the  name  given  to  such  steamers  as 
have  no  regular  route,  but  run  wherever  and  whenever 
they  can  get  a  cargo — still  further  tends  to  drive  sailing 
vessels  out  of  lines  of  trade  in  which  they  had  hitherto 
felt  themselves  secure.  The  effect  is  clearly  enough  seen 
in  the  statistics.  Of  the  world’s  tonnage  in  1870,  eleven 
per  cent,  was  steam,  eighty-nine  per  cent.  sail.  In  1880 
twenty-five  per  cent,  was  steam,  seventy-five  per  cent.  sail. 
Now  a  steamer,  on  account  of  superior  speed,  is  from 
three  to  five  times  as  efficient  as  a  sailing  vessel  of  the 
same  size.  With  an  apparent  increase  of  only  fifteen  per 
cent,  in  tonnage,  there  has  been  an  actual  increase  of 
from  thirty-five  to  fifty  per  cent,  in  carrying  power — an 
increase  with  which  international  trade  has  more  than 
kept  pace.1 

What  happened  on  sea,  in  the  substitution  of  steam  for 
sail,  was  more  than  paralleled  on  land  in  the  substitution 
of  railroads  for  roads  and  canals. 

The  change  dates  from  the  beginning  of  the  present 
century.  In  1801  the  first  chartered  line  of  rails  was  laid 
— a  short  horse-railroad  from  Wandsworth  to  Croydon,  in 
the  suburbs  of  London.  Similar  lines  were  built  in 
almost  every  succeeding  year.  In  1814  it  was  discovered 
that  cars  could  be  propelled  by  the  adhesion  of  a  smooth 
wheel  to  a  smooth  rail.  This  showed  how  steam  power 
could  be  applied.  It  only  remained  to  find  a  practicable 

1  M.  G.  Mulhall :  “Balance  Sheet  of  the  World.”  London,  1881.  Table 
10  and  remarks. 


10 


RAILROAD  TRANSPORTATION. 


means  of  generating  this  power  in  a  locomotive  engine. 
Two  things  were  necessary  for  this  purpose — sufficient 
draft  to  keep  up  a  hot  fire,  and  a  large  heating  surface  in 
a  small  compass  on  which  to  apply  it.  The  escape-steam 
blast  provided  the  draft.  The  tubular  boiler  provided 
the  heating  surface.  When  George  Stephenson  combined 
the  two,  the  result  was  the  modern  railroad  locomotive, 
complete  in  its  essential  features.1 

It  had  required  a  hard  struggle  to  secure  a  charter  for 
the  Liverpool  and  Manchester  railroad,  so  strong  was  the 
opposition  of  vested  interests.  Only  such  a  politician  as 
Huskisson  could  have  done  it  at  all;  and  even  he  had  to 
spend  £70,000  to  carry  it  through.  But  the  success  of 
this  one  railroad  assured  the  construction  of  many  others, 
not  in  England  only,  but  elsewhere.  The  United  States 
had  already  made  a  beginning  in  railroad  construction  ; 
the  work  was  now  actively  pushed  forward  at  half  a  dozen 
different  points.  The  Belgian  Government  was  quick  to 
lay  out  an  admirable  railroad  system  ;  and  several  districts 
of  Germany  were  not  far  behind. 

It  was  not  a  mere  accident  of  history  that  France  took 
no  part  in  this  movement.  Nor  was  it  simply  because 
her  admirable  system  of  roads  and  canals  made  railroads 
seem  less  necessary.  It  was  because  France  disliked  to 
build  railroads  at  all  until  it  could  be  done  under  a  com- 
prehcnsive  plan.  It  was  not  in  the  French  characterTo 
do  things  piece-meal.  Yet  this  was  exactly  what  other 
nations  were  doing,  and  were  forced  to  do,  with  their  first 
railroads.  Nowhere,  except  in  Belgium,  were  the  lines 
systematically  arranged.  Nowhere  was  the  management 
any  thing  better  than  a  makeshift.  They  were  playing 

1  W.  II.  Brown:  “  History  of  the  First  Locomotives  in  America.”  New 
York,  1871.  pp.  49-51. 


THE  MODERN  TRANSPORTATION  SYSTEM. 


II 


and  experimenting  with  a  new  device,  of  whose  uses  and 
laws  they  had  but  a  faint  idea.  They  supposed  that  its 
chief  use  would  be  the  conveyance  of  passengers,  and  that 
it  would  be  subject  to  the  same  laws  as  the  old  turnpike 
roads.  When  the  first  charters  were  granted  in  England 
and  Germany,  it  was  assumed  that  the  company  would 
own  the  road-bed,  simply  as  a  canal  company  would  own 
its  canal ;  that  any  man  could  own  cars  and  run  trains, 
just  as  he  would  own  and  run  canal  boats  or  wagons. 
Under  this  view,  the  railroad  charges  were  to  be  nothing 
more  nor  less  than  a  system  of  tolls.  Many  railroad 
charters  contained  long  schedules  of  this  kind,  with 
hundreds  of  different  provisions,  none  of  them  of  any 
practical  use.  These  more  obvious  absurdities  have  been 
gradually  abandoned  ;  but  many  of  the  indirect  effects  of 
this  idea  are  still  felt  in  the  legislation  of  the  present 
day.1 

The  early  railroad  engineers  overestimated  the  speed 
which  could  be  readily  attained.  Fifty  years  ago  it  was 
generally  expected  that  passenger  trains  would  soon  run 
at  rates  of  from  seventy-five  to  one  hundred  miles  an 
hour — a  prediction  which  has  as  yet  remained  unfulfilled. 
On  the  other  hand,  they  underestimated  the  railroad’s 
capacity  for  doing  work  cheaply.  It  was  not  supposed 
that  railroads  would  ever  be  able  to  compete  with  water 
routes  in  the  carriage  of  freight,  except  where  speedy 
delivery  was  of  the  first  importance.  Nor  was  it  at  that 
time  desired  that  they  should  do  so.  The  first  English 
railroad  charter  contained  provisions  expressly  intended 
to  prevent  such  competition.  A  generation  later,  in  the 
State  of  New  York  itself,  there  was  a  loud  popular  cry 


1  Chas.  Francis  Adams,  Jr.  :  “  Railroads  and  Railroad  Questions."  New 
York,  1878.  pp.  82-84.  Cohn:  “  Untersuchungen,"  chapters  i.,  ii. 


12 


RAILROAD  TRANSPORTATION. 


/ 


that  the  New  York  Central  must  be  prohibited  from 
carrying  freight  in  competition  with  the  Erie  Canal.1 
The  main  field  of  usefulness  of  railroads,  and  the  means 
by  which  that  field  was  to  be  developed,  were  not  merely 
ignored,  they  were  positively  shunned. 

This  period  of  railroad  infancy  ended  about  the  year 
1850.  The  crisis  of  1847  marked  its  close  in  England. 
The  Revolution  of  1848-51  was  the  dividing  line  on  the 
continent  of  Europe.  The  land  grants  of  1850,  and  the 
formation  of  three  trunk  lines 2 3  from  the  seaboard  to  the 
interior  may  be  taken  as  the  beginning  of  the  new  era  in 
the  United  States.  It  began  to  be  seen  and  felt  that  a 
steam  railroad  was  something  more  than  an  exaggerated 
turnpike  or  horse  railroad,  and  that  it  had  functions  and 
laws  of  its  own.  The  changes  were  :  first,  the  consolida¬ 
tion  of  old  roads ;  second,  the  construction  of  new  ones  in 
a  great  variety  of  conditions ;  third,  and  most  important, 
the  development  of  traffic  by  cheap  rates  and  new  methods. 

I.  Consolidation. — The  early  railroad  charters  were  for 
short  independent  lines.  In  England  they  averaged  only 
about  fifteen  miles  in  length.  In  the  year  1847  there  were 
five  thousand  miles  of  railroad  open,  owned  by  several 
hundred  different  companies.  Twenty-five  years  later 
there  were  thirteen  thousand  miles,  virtually  the  whole 
of  which  was  in  the  hands  of  twelve  different  companies. 
In  France,  the  number  of  independent  systems  was  re- 
duced  from  thirty-three  in  1847  to  eleven  in  1852,  and  six 
in  1859.  wc  follow  back  the  history  of  almost  any  rail¬ 
road  in  the  United  States,  we  find  the  same  tendency 

1  Henry  V.  Poor :  “  Manual  of  Railroads  of  the  United  States  for  1881.” 

Introduction,  pp.  24-39. 

3  There  had  been  for  ten  years  previous  an  all-rail  route  across  New  York 
State,  but  its  consolidation  under  one  company  did  not  take  place  till  1853. 
The  Erie  was  opened  as  a  through  route  in  1851,  the  Pennsylvania  in  1854. 


THE  MODERN  TRANSPORTATION  SYSTEM. 


13 


illustrated.  The  line  of  the  New  York  Central  between 
the  Hudson  and  Lake  Erie  alone  represents  the  union  of 
what  was  originally  sixteen  different  companies.  The 
economic  laws  which  govern  this  movement  will  form  a 
subject  of  subsequent  discussion.1  Railroad  consolidation 
has  always  been  regarded  by  the  public  with  a  kind  of 
vague  fear.  As  long  as  it  was  a  mere  union  of  connecting 
lines  into  one  through  route,  the  advantages  to  the  pub¬ 
lic  in  speed,  accuracy,  and  good  organization  have  been  so 
obvious  as  to  silence  the  fear  of  corporate  power.  When 
it  was  a  case  of  the  union  of  competing  lines,  the  advan¬ 
tages  to  the  public  have  been  less  obvious,  the  dangers 
apparently  greater,  and  the  opposition  always  louder  and 
sometimes  more  effective.  * 

2.  JLxltmsim. — Consolidation  of  itself  created  through 
routes  and  long-distance  traffic.  Improvements  in  engi¬ 
neering  produced  the  same  results  in  another  way.  It 
had  been  at  first  supposed  that  railroads  could  only  work 
to  advantage  on  level  routes ;  in  general,  where  good  roads 
or  canals  already  furnished  cheap  transportation.  It  was 
now  found  possible  to  build  mountain  railroads;  not 
merely  to  supersede  existing  means  of  communication, 
but  to  go  far  beyond  them.  The  first  railroad  across  the 
AIjds  — the  Semmering  from  Vienna  toward  Trieste — was 
built  in  1854.  The  Brenner  Railroad  from  Munich 
to  Italy  was  completed  in  1867.  The  Mt.  Cenis,  from 
Lyons  to  Turin,  with  a  tunnel  seven ~and  a  hklf  miles  in 
length,  was  opened  in  1871  ;  the  St.  Gothard,  through 
Switzerland,  with  a  nine-mile  tunnel~undef^tEe  very  heart 
of  the  Alps,  in  18.82.  Other  parts  of  the  world  had  shared 
in  this  progress.  The  Union  and  Central  Pacific  route 
was  opened  in  1869;  so  many  other  roads  across  the 


1  Chapters  iv. ,  v. 


1 


14  RAILROAD  TRANSPORTATION. 

Rocky  Mountains  have  since  been  built  that  we  cease  to 
count  them  any  thing  extraordinary.  British  India  is 
traversed  by  railroads  in  every  direction,  eleven  thousand 
miles  in  all.  A  railroad  across  the  main  chain  of  the 
Andes  from  Chili  to  Buenos  Ayres  is  just  being  com¬ 
pleted.  A  line  across  the  Ural  Mountains  and  far  into 
Siberia  is  in  process  of  construction. 

Some  of  these  roads  have  created  international  trade 
where  formerly  there  was  little  or  no  communication. 
Others  have  pushed  on  in  advance  of  civilization  itself, 
creating  the  communities  which  were  to  support  them. 
These  roads  could  not  be  built  expensively ;  it  was  a 
question  between  a  cheap  road  or  no  road  at  all.  In 
America  the  question  how  to  build  such  roads  took  care 
of  itself.  Land  was  cheap ;  wood  was  cheap ;  it  only  t 
remained  to  select  such  a  course  as  would  involve  the 
least  outlay  for  grading,  cuttings,  or  bridges ;  put  down 
sleepers  on  the  ground  itself,  lay  the  cheapest  rails  that 
would  hold  together,  and  trust  to  the  future  for  any  more 
solid  construction.  In  Europe,  on  the  other  hand,  the 
question  was  made  the  subject  of  scientific  study.  Great 
attention  was  paid  to  systems  of  narrow-gauge  railroad 
construction  to  be  applied  in  the  case  of  localities  with 
light  traffic,  in  mountainous  districts,  or  under  stress  of 
military  necessity.1 

Military  and  political  reasons  have  had  a  great  deal  to 
do  with  the  bolder  instances_of  railroad  extension.  ItTls 
to  such  reasons  that  we  owed  the  building  of  the  Union 
Pacific.  The  same  thing  may  be  said  of  all  the  large 
mountain  railroads  of  the  Old  World.  But  railroads  have 

1  The  engineering  literature  on  the  subject  is  large.  From  the  political 
standpoint  the  most  noticeable  work  is  probably  “  M.  M.  v.  Weber:  Der 
Staatliche  Einfluss  auf  die  Entwickelung  der  Eisenbahnen  minderer  Ord- 
nung.”  Vienna,  1878. 


THE  MODERN  TRANSPORTATION  SYSTEM. 


15 


a  special  use  in  modern  war  quite  apart  from  these  more 
general  considerations  of  political  influence.  Napoleon  is 
quoted  as  saying,  that  the  strength  of  an  army  lies  in  its 
legs.  Modern  improvements  have  made  this  saying  still 
truer  to  day  than  it  was  eighty  years  ago.  The  lack  of  a 
few  miles  of  railroad  connection  in  1859  probably  caused 
Austria  to  lose  the  battles  of  Solferino  and  Magenta,  and 
changed  the  whole  destiny  of  Italy.  The  energetic  con¬ 
trol  and  use  of  every  railroad  line  in  1870  enabled 
Germany  to  put  her  troops  where  they  were  most  needed, 
and  strike  those  telling  blows  which  virtually  decided  the 
contest  in  the  first  few  days.  One  of  the  most  important 
lessons  of  our  war  was  upon  the  value  of  railroad  communi¬ 
cation  at  the  very  front.  We  learned  to  destroy  it  for  the 
enemy  quickly  and  thoroughly ;  to  repair  or  construct  it  for 
ourselves  less  thoroughly  but  about  as  quickly.  How  this 
lesson  has  been  taken  to  heart  is  shown  by  the  military 
railroads  of  France  in  Tunis,  of  England  in  Egypt,  of 
Russia  beyond  the  Caspian.  It  is  seen  on  a  larger  scale 
in  the  system  of  railroads  in  Prussia,  Austria,  Russia,  or 
India ;  many  of  them  built-not  as  one  would  build  docks 
and  canals,  but  as  one  must  build  forts  and  arsenals. 

Under  all  these  influences  the  railroad  mileage  of  the 
world  increased  from  twenty  thousand  in  18^0  to  sixty- 
six  thousand  in  i860,  one  hundred  and  thirty-seven  thou- 
sand  in  1870,  two  hundrecT arid  tvventy-five  thousand  in 
1880,  and  about  two  hundred  and  eighty-five  thousand  at 
present.  Of  the  later  construction  very  little  was 
intended  to  meet  the  wants  of  existing  business.  Some 
of  it  was  due  to  political  considerations ;  the  remainder — 
perhaps  two  thirds  of  the  whole  amount — was  intended  to 
develop  new  regions  and  new  trade.1 


1  Neumann-Spallart,  pp.  413-430. 


1 6  RAILROAD  TRANSPORTATION. 

1 1  3.  Business  Development. — Rapid  as  has  been  the 

!  4  growth  of  the  railroad  mileage,  traffic  has  kept  pace  with 
it.  It  is  estimated  that  the  total  number  of  tons  moved 
in  1875  was  about  eight  hundred  million.  At  present  it 
is  about  twelve  hundred  million  annually,  while  the  pas-" 
senger  movement  has  increased  from  fourteen  hundred 
million  to  twenty-four  hundred  million.  If  we  could  take 
distance  as  well  as  quantity  into  account,  the  change  (for 
freight  at  any  rate)  would  be  still  greater.  To  a  certain 
extent  this  increased  intensity  of  use  of  railroads  is  due  to 
improvements  in  engineering  ;  to  a  much  greater  extent 
it  is  the  result  of  improved  business  methods. 

It  took  some  time  for  railroad  authorities  to  wake  up 
to  a  fact  which  now  seems  self-evident,  namely,  that  the 
profitableness  of  a  railroad  as  a  whole,  or  of  any  particular 
part  of  its  business,  depends  quite  as  much  upon  the 
volume  of  traffic  secured  as  upon  the  absolute  price 
charged.  It  was  further  seen  that  certain  lines  of  business 
were  of  such  a  character  that  little  or  no  movement  could 
be  obtained  at  high  rates,  while  a  great  deal  could  be  had 
if  the  rates  were  made  low  enough.  This  was  found  to 
be  the  case  with  many  cheap  articles  of  common  use — 
above  all,  with  coal ;  also  with  stone,  lumber,  or  even  food 
products.  A  reduction  of  rates  on  these  articles  had  the 
further  advantage  that  it  stimulated  business  in  such  a 
way  as  to  give  the  railroads  niore’of  oTher  articles  to  carry. 
Thus  a  change  which  would  have  been  ruinous  if  applied 
to  the  whole  system,  was  found  highly  advantageous  in 
many  instances.  The  princjple  was  not  merely  applied  in 
favor  of  certain  classes  of  business,  but  in  favor  of  the 
long-distancTtraffic  IrTgeneral.  The  old  system  of  tolls, 
by  whicncertain  rates  per  mile  were  charged,  was  abso¬ 
lutely  prohibitory  to  most  long-distance  traffic.  For 


THE  MODERN  TRANSPORTATION  SYSTEM. 


1 7 


instance,  a  rate  of  three  cents  per  ton  per  mile,  which  was 
usual  thirty  years  ago,  would  make  it  cost  about  a  dollar 
a  bushel  to  get^jtyheat  from  Chicago  to  NewYork.  To 
reduce  rates  suddenly  on  all  traffic  might  have  proved 
ruinous.  What  they  actually  did  was  to  reduce  rates 
where  there  would  be  an  increase  in  the  volume  of  business 
to  make  up  for  it.  This  marked  the  abandonment  of  the 
crude  idea  of  tolls,  and  the  substitution  of  the  principle  of 
making  rates  to  develop  business.1 

The  actual  effect  of  this  change  was  a  general  reduction 
of  rates  (at  almost  every  point),  combined  with  vastly  in¬ 
creased  efficiency  on  the  part  of  the  railroad  system.2 3 
Unfortunately  its  action  has  been  unequal,  producing  fre¬ 
quent  instances  of  hardship  and  of  abuse.  These  abuses 
have  been  sometimes  so  flagrant,  as  to  call  forth  serious 
attempts  to  return  to  the  old  system  of  tolls.  The  system 
of  making  rates  to  develop  business,  or  of  “  charging  what 
tlte  traffic  will  bear/’  rightly  applied,  has  bcerTThe  means 
— and  we  shall  find  it  to  be  the  only  possible  means — of 
securing  efficient  service  and  low  rates.  It  has  been  so 
abused  and  misunderstood  by  all  parties  as  to  have  become 
a  synonym  for  unchecked  extortion — a  pretext  for  char¬ 
ging  what  the  traffic  will  not  bear. 

Between  1850  and  1880  rates  were  reduced  on  an  aver¬ 
age  to  about  one  half  their  former  figures,  in  spite  of  the 
advance  in  price  of  labor  and  of  many  articles  of  con¬ 
sumption.  A  variety  of  means  were  made  to  contribute 
to  this  result.  The  inventions  of  Bessemer  and  others,  by 
which  it  became  possible  to  substitute  steel  rails  for  iron, 
•  made  it  profitable  for  the  railroads  to  carry  larger  loads 

1  The  change  began  independently  in  several  countries — particularly  Eng¬ 
land,  Belgium,  and  the  United  States  ;  but  it  has  been  carried  farther  in  the 

United  States  than  anywhere  else. 

3  Compare  chapter  vi. 


i 


1 8  RAILROAD  TRA NSP OR  TA  TION. 

at  a  reduction  in  rates.  Improvements  in  management 
increased  the  effective  use  of  the  rolling  stock,  while  the 
consumption  of  fuel  and  the  cost  of  handling  were  dimin¬ 
ished.  By  other  changes  in  railroad  economy  it  became 
possible  to  compete  for  business  of  every  kind,  with  the 
best  canals  or  with  natural  water-courses.  The  railroad 
rates  of  to-day  are  but  a  small  fraction  of  the  canal  charges 
of  two  generations  ago  ;  while  in  volume  of  business, 
speed,  and  variety  of  use  there  is  an  inestimable  advance. 

When  the  Austrian  Government,  fifty  years  ago,  re¬ 
garded  railroads  with  dislike  as  being  of  a  revolutionary 
nature,  it  judged  rightly.  Improved  communication  has 
played  havoc  with  the  European  system  of  Metternich 
and  of  the  Holy  Alliance.  The  diffusion  of  intelligence 
by  the  post-office  and  the  telegraph  has  forced  the  most 
conservative  authorities  to  move.  The  rush  of  travel  has 
broken  down  the  passport  system.  The  extension  of 
trade  is  forcing  us  into  unity  of  money,  weights,  and  • 
measures.  It  has  prevented  each  nation  from  settling  if? 
own  problems  by  itself.  The  land  rents  which  lie  at  the 
base  of  the  social  order  in  England  are  threatened  by 
changes  in  the  production  of  wheat  in  Dakota  or  Ne¬ 
braska.  Chicago  and  Calcutta  are  virtually  nearer  to  one 
another  to-day,  in  all  matters  of  business,  than  London 
and  Vienna,  not  to  say  London  and  Paris,  were  a  century 
ago.  The  policy  of  protective  tariffs  is  but  a  slight  obsta¬ 
cle  to  international  trade.  Cheapened  transportation  more 
than  counteracts  it. 

We  no  longer  produce  for  the  home  market,  but  for  the 
world’s  markets.  It  is  by  the  world’s  supply  and  demand 
that  prices  are  made.  The  development  of  transportation 
has  been  the  main  instrument  of  this  change.  It  has 
gone  hand  in  hand  with  the  extension  of  the  credit  sys- 


THE  MODERN  TRANSPORTATION  SYSTEM.  1 9 


tern  ;  each  has  supplemented  the  other.  The  bill  of 
lading  is  made  to  serve  the  same  purpose  as  the  bill  of 
exchange.  The  movements  of  international  trade  are 
helped  forward  by  telegraphic  transfers  of  money.  Trans¬ 
actions  which  would  formerly  have  taken  months  to  com¬ 
plete  are  now  settled  in  half  an  hour.  In  one  sense,  time, 
money,  and  risk  are  spared.  Yet  the  very  possibility  of 
doing  all  these  things  so  smoothly  is  the  most  powerful 
stimulant  to  speculation,  and  creates  more  risks  than  it 
annuls. 

If  it  becomes  possible  for  me  to  sell  my  goods  in  mar¬ 
kets  five  thousand  miles  distant,  it  becomes  possible  for  a 
hundred  other  producers  in  a  dozen  different  parts  of  the 
globe  to  do  the  same  thing,  and  compete  with  me  at 
almost  every  point.  Of  the  conditions  under  which  my 
competitors  are  working  I  can  judge  but  imperfectly;  of 
the  mistakes  which  they  are  likely  to  make,  I  can  hardly 
judge  at  all.  No  one  producer  can  judge  of  the  aggre¬ 
gate  supply  and  demand  of  the  world.  If  a  few  reckless 
producers  make  a  mistake,  it  means  not  merely  local  over¬ 
supply,  but  over-supply  in  every  market,  a  fall  of  prices 
everywhere.  The  ruin  of  a  few  drags  down  all  the  rest 
into  cut-throat  competition.  In  this  over-production,  real 
or  apparent,  railroads  are  not  merely  the  instruments,  but 
also  the  sufferers.  The  causes  which  lead  to  increased 
prices  and  increased  production,  lead  to  the  multiplication 
of  railroads  beyond  all  reason.  When  prices  fall,  railroad 
charges  have  to  be  reduced  to  unremunerative  figures  in 
order  to  retain  any  business  at  all.  And  railroads  have  not 
the  refuge,  available  in  most  other  lines  of  business,  either 
of  contracting  their  capital  or  of  driving  their  competitors 
out  of  business.  A  railroad  once  built  hs  come  to  stay.  It 
can  neither  retire  from  business  voluntarily,  nor  be  forced 


20 


RAILROAD  TRA NSPOR  TA  TION. 


to  do  so  by  any  other  competitor.  Drive  it  into  bank¬ 
ruptcy,  and  it  only  fights  the  more  strongly  and  reck¬ 
lessly.  The  railroad  is  thus  at  once  the  instrument  and 
the  extreme  sufferer,  in  the  speculation,  over-production, 
and  commercial  crises  of  the  present  day. 

The  concentration  of  industry  in  large  cities  is  directly 
connected  with  improved  transportation.  When  roads 
were  the  chief  means  of  transportation,  the  size  of  cities 
was  limited  by  the  available  supply  of  food.  Railroad 
enterprise  has  so  widened  these  limits  by  its  express 
services  for  milk,  fruit,  or  vegetables,  and  its  cheap  long¬ 
distance  movement  of  grain  or  meat,  that  there  is  practi-  ■ 
cally  no  such  restraint  felt.  But  there  has  been  much  more 
than  a  mere  removal  of  barriers.  Reference  has  already 
been  made  to  the  inequality  of  railroad  rates.  This 
inequality  always  operates  in  favor  of  large  cities.  The 
reduction  in  rates  was  made  under  the  stress  of  competi¬ 
tion.  It  was  made  first  and  fullest  where  competition  was 
sharpest.  Even  in  those  countries  in  Europe  where  the 
state  owned  many  of  the  railroads,  but  feeble  opposition 
was  offered  to  this  tendency  during  the  years  1850-1872. 
In  England  and  the  United  States  it  was  pursued  with 
utter  recklessness. 

The  aggregation  of  business  in  cities,  of  itself  gives 
the  large  establishment  an  advantage  over  the  small  dealer. 
The  latter  has  no  longer  a  local  custom  of  which  he  is 
sure.  His  personal  attention  to  details  begins  to  count 
for  less.  His  competitor’s  large  capital  and  wide  connec¬ 
tion  count  for  more.  Too  often,  mere  unscrupulousness 
in  business  may  seem  to  count  for  most  of  all.  The  small 
capitalist  and  the  independent  workman  are  crushed  out. 
The  distinction  of  employers  and  employed  becomes  more 
sharply  drawn.  The  workman  can  no  longer  confidently 


THE  MODERN  TRANSPORTATION  SYSTEM. 


21 


hope  to  become  the  employer  of  his  own  labor.  It  is 
these  tendencies  which  give  force  to  the  agitation  in  favor 
of. socialism.  Unfortunately  the  effect  of  the  policy  of 
most  of  our  railroads  is  to  intensify  these  tendencies. 
They  do  not  merely  favor  cities  ;  they  favor  individual 
producers.  The  largest  or  most  unscrupulous  concern 
gets  the  best  rates.  Differences  are  made  which  are 
sufficient  to  cripple  all  smaller  competitors,  and  sooner 
or  later  drive  them  to  the  wall,  and  concentrate  industry 
in  a  few  hands. 

What  makes  things  seem  worse  is  that  in  this  matter, 
as  in  speculation,  the  railroad  is  not  merely  an  instrument 
fostering  monopoly  ;  it  is  itself  an  example  of  the  ten¬ 
dency  toward  monopoly.  Railroad  consolidation  has  put 
the  control  of  the  country’s  business  into  the  hands  of  a 
few  large  corporations.  The  owners  may  be  numerous, 
the  actual  managers  are  few.  It  is  useless  to  strive 
against  this  tendency.  Consolidation  lowers  rates  and 
makes  enlightened  economy  possible.  It  usually  lessens 
the  specific  abuses  of  power.  But  the  power  itself  is 
vastly  increased ;  while  the  owners  are  at  the  same  time 
removed  from  all  apparent  contact  or  sympathy  with  the 
communities  whom  they  serve.  Serious  conflicts  of  in¬ 
terests  concerning  a  turnpike  or  bridge  were  almost 
impossible,  because  those  who  owned  them  and  those 
who  used  them  were  to  a  large  extent  the  same,  or,  at 
any  rate,  came  in  personal  contact.  But  where  one  set  of 
men  own  a  railroad  and  another  set  of  men  use  it,  the  two 
only  coming  in  contact  through  the  medium  of  the  rail¬ 
road  management,  we  have  a  state  of  things  corresponding 
to  the  “  absenteeism  ”  of  Irish  landlords,  and  involving 
conflicts  or  dangers  of  the  same  kind.1 

1  Iowa  Railroad  Commissioners’  Report,  1884,  pp.  5,  6. 


22 


RAILROAD  TRANSPORTATION. 


This  condition  of  things  became  obvious  about  1870; 
and  it  is  against  these  evils  and  dangers  that  subsequent- 
legislation  has  been  almost  entirely  directed.  The  years 
1870-3  are  marked  by  a  change  in  the  aims  of  railroad 
legislation,  more  obvious  perhaps  than  the  change  in 
principles  of  railroad  management  twenty  years  earlier. 
A  noticeable  thing  about  the  changes  of  legislative  aim 
was  the  suddenness  with  which  they  made  themselves 
felt  all  over  the  world.  Hitherto  the  object  had  been  to 
secure  rapid  increase  of  railroad  facilities.  With  this  end 
in  view  England  allowed  the  utmost  freedom  from  restric¬ 
tion  ;  the  United  States  granted  almost .  reckless  subsi¬ 
dies  of  land,  or  guaranteed  bonds  ;  on  the  continent  of 
Europe  some  states  gave  direct  pecuniary  assistance  to 
private  companies,  other  states  built  railroads  themselves. 
The  main  object  was  support  rather  than  control.  The 
most  they  feared  was  that  charges  in  general  might  be  too 
high,  and  this  they  sometimes  sought  to  prevent  by  law. 
That  the  community  might  be  injured  by  the  reduction 
of  some  charges  more  than  others,  scarcely  entered  the 
minds  of  the  majority  of  legislators  and  statesmen.  The 
very  worst  forms  of  discrimination  were  gTven  fey  state 
railroads  themselves,  apparently  without  suspicion  of 
harm. 

The  reaction  was  sudden  and  widespread.  In  the  years 
immediately  following  1872,  the  Granger  movement  did 
its  work  in  the  United  States;  the  Railway  Commission 
was  established  in  England ;  Belgium  and  Prussia  de¬ 
termined  to  change  from  a  mixed  system  t£  a_svstem  of 
state  ownership  pure  and  simple ;  France  and  Italy  began 
a  policy — eventually  unsuccessful — of  state  purchase  and 
management.  The  general  object  was  the  same  in  every 
case.  Hitherto  legislation  had  been  conceived  from  the 


THE  MODERN  TRANSPORTATION  SYSTEM.  23 

standpoint  of  the  investor — whether  that  investor  was  a 
private  company  or  the  state  itself,  mattered  little.  Hence¬ 
forward  things  were  looked  at  from  the  standpoint  of  the 
shipper,  and  especially  of  those  shippers  who  under  the 
old  system  were  being  driven  to  the  wall. 

It  can  hardly  be  doubted  that  the  reaction  was  a  health¬ 
ful  one  in  itself.  It  is  still  more  certain  that  it  was  often 
carried  to  an  unfortunate  extreme.  It  is  safe  to  say  that 
a  large  part  of  the  railroad  legislation  of  the  last  twelve 
years  could  never  be  carried  out  at  all,  and  that  a  large 
part  of  the  remainder  would  do  more  harm  than  gojxTto 
all  concerned.  The  attempt  to  legislate  for  the  shippers 
without  regard  to  the  railroads  is  as  much  cf  a  mistake" as 
the  attempt  to  legislate  for  the  railroads  without  regard 
'  to  the  shippers.  To  reconcile  these  two  interests^ap- 
parently  conflicting  and  yet  mutually  dependent  upon 
one  another — is  one  of  the  most  serious  problems  of 
modern  business  or  modern  politics. 


y 


CHAPTER  II. 


THE  GROWTH  OF  UNITED  STATES  INTERNAL  COMMERCE. 

Badness  of  early  means  of  communication — Construction  of  turnpike  roads — 
National  aid  to  internal  improvements — The  Cumberland  road — Water 
routes — The  Erie  Canal — Other  canals — First  experiments  in  railroad 
building — The  Baltimore  and  Ohio — Railroads  about  Philadelphia  ;  in 
the  South  ;  in  New  York  ;  in  Massachusetts — Development  of  railroads 
in  New  England  1840-1850  ;  in  the  Central  States  1850-56 — Land- 
grant  roads  before  and  after  the  war — Successive  periods  of  speculative 
railroad  development — Different  aspects  of  railroad  history. 

Tenth  Census  of  the  United  States,  18S0,  vol.  iv. 

Introduction  to  Poor’s  “  Manual  of  Railroads  of  the  U.  S.,”  1 88 1. 

M.  Chevalier  :  “  Histoire  et  Description  des  Voies  de  Communication  en 
Amerique.”  3  vols.  Paris,  1840.  This  was  an  excellent  work  in  its  time. 
An  American  authority  of  about  the  same  date  is  H.  S.  Tanner  :  “  Canals 
and  Railroads  of  the  United  States.” 

P.  F.  Kupka  :  “  Die  Verkehrsmittel  in  den  Vereinigten  Staaten  von 
Nordamerika.”  Leipzig,  1883.  A  mere  compilation,  but  containing  much 
good  material. 

One  hundred  years  ago  the  United  States  had  no 
system  of  transportation.  Except  on  natural  water¬ 
courses  it  had  very  little  transportation  of  any  kind. 
The  roads  were  built  by  local  authorities  for  local  pur¬ 
poses — and  badly  built  at  that.  Wagon  conveyance 
was  slow  and  expensive.  It  took  a  week  to  go  from 
Boston  to  New  York  by  stage,  and  nearly  three  weeks 
to  reach  Charleston.  Although  this  was  the  most  fre¬ 
quented  route,  there  was  only  a  tri-weekly  mail  at  best. 
The  postal  service  was  irregular  and  unsafe.  Passenger 
journeys  were  attended  with  discomfort,  and  not  infre- 


24 


UNITED  STATES  INTERNAL  COMMERCE. 


25 


quently  with  danger.1  Long-distance  freight  movement 
was  absolutely  impossible.  The  charge  for  hauling  a 
cord  of  wood  twenty  miles  was  three  dollars.  For  haul¬ 
ing  a  barrel  of  flour  one  hundred  and  fifty  miles  it  was 
five  dollars.  Either  of  these  charges  was  sufficient  to 
double  the  price  01  the  article  and  set  a  practical  limit  to 
its  conveyance.  Salt,  which  cost  one  cent  a  pound  at  the 
shore,  would  sometimes  cost  six  cents  a  pound  three 
hundred  miles  inland,  the  difference  representing  the  bare 
cost  of  transportation.2  It  was  on  these  cheap  articles  of 
common  use  that  the  charge  bore  most  heavily.  It 
forced  every  community  to  live  within  itself.  To  what 
extremes  it  was  carried  is  shown  by  the  whiskey  insurrec¬ 
tion  of  1798.  The  settlers  of  Western  Pennsylvania  had 
no  manufactures  of  their  own.  They  depended  upon  the 
East  for  all  such  supplies,  and  could  only  pay  for  them  by 
the  produce  of  their  farms.  Grain  in  its  natural  state 
was  so  bulky  that  the  cost  of  transporting  it  across  the 
Alleghanies  was  simply  prohibitory.  Distilled  into 
whiskey,  its  bulk  was  far  less  in  proportion  to  its  value, 
and  the  cost  of  transportation  correspondingly  less. 
The  tax  upon  whiskey  was  to  them  a  tax  upon  their  sole 
exchangeable  product,  and  threatened  to  deprive  them  of 
all  commerce  with  the  outside  world.  Had  there  been  no 
improvement  in  the  means  of  transportation,  this  piece 
of  history  must  have  repeated  itself. 

Three  successive  improvements  were  introduced  in  the 
next  generation  :  turnpikes,  canals,  and  railroads. 

Turnpike  roads  marked  an  advance,  not  merely  be¬ 
cause  they  were  better  built,  but  because  they  were  built 
to  accommodate  through  traffic.  The  early  roads  had 

1  MacMaster  :  “  History  of  the  People  of  the  United  States,”  i.,  52-68. 

s  “American  State  Papers,”  vol.  xx.,  p.  919. 


26 


RAILROAD  TRANSPORTATION. 


been  administered  by  local  authorities — the  townships  in 
New  England,  the  counties  elsewhere.  The  system  was 
taken  from  England.  But  in  England  it  had  broken 
down  a  century  and  a  half  ago,  and  had  been  supple¬ 
mented  by  a  system  of  “  turnpike  trusts  ” — that  is,  the 
trustees  were  empowered  to  borrow  money  to  build  such 
roads,  and  were  empowered  to  charge  such  tolls  as  would 
suffice  to  pay  the  interest  on  the  investment,  and  gradu¬ 
ally  to  pay  off  the  principal  also.1  In  other  words  they 
were  built  by  bonds  without  stock.  In  America  they 
were  usually  built  by  stock  without  bonds — that  is,  turn¬ 
pike  companies  took  the  place  of  turnpike  trusts,  and  no 
attempt  was  made  to  pay  up  the  principal.  This  was  on 
the  whole  an  improvement  on  the  English  system. 

The  first  American  turnpike  was  built  in  i ^qo.  The 
system  developed  first  in  Pennsylvania,  then  in  New  York 
and  Southern  New  England.  South  of  the  Potomac  it 
took  practically  no  root.  On  the  whole  the  State  of  New 
York  seems  to  have  carried  out  the  system  most  com¬ 
pletely.  Several  of  the  States — notably  Pennsylvania, 
and  later,  Kentucky — gave  subsidies  to  turnpikes.2  Up  to 
1822  Pennsylvania  had  paid  nearly  two  million  dollars,  or 
over  one  thousand  dollars  a  mile  in  this  way — about  one 
third  of  the  total  cost. 

On  the  whole  these  roads  seem  to  have  paid  a  fair  re¬ 
turn  on  the  investment,  and  to  have  given  reasonable 
satisfaction  to  the  public.  In  spite  of  rather  high  tolls, 
they  so  reduced  wear  and  fatigue  of  movement,  as  to 
cheapen  transportation,  in  many  cases  nearly  fifty  per 
cent. 

The  subject  of  national  aid  to  roads  was  first  vigorously 


1  Edinburgh  Review,  April,  1864. 
3  Kupka,  pp.  6-8. 


UNITED  STATES  INTERNAL  COMMERCE. 


27 


taken  up  by  Gallatin  in  1808,  and  again  by  Calhoun  in 
1 8 1 8.1  It  was  argued  by  Gallatin  that  the  money  spent 
on  roads  would  be  far  more  than  saved  in  transportation 
expenses  ;  so  that  if  you  put  a  moderate  duty  on  im¬ 
ported  goods  and  spent  this  revenue  on  roads,  the  cheap¬ 
ened  transportation  would  lessen  the  average  price  of 
goods  more  than  the  tariff  would  raise  it.  Gallatin,  who 
was  Secretary  of  the  Treasury  at  the  time,  put  the  whole 
matter  on  economic  grounds  ;  Calhoun,  ten  years  later; 
took  up  the  matter  as  Secretary  of  War,  and  argued  the 
subject  on  the  grounds  of  military  strength.  But  the 
actual  decision  of  the  question  was  based  on  political 
grounds  rather  than  on  economic  or  military  ones ;  and 
in  this  aspect  it  was  taken  up  by  the  party  opposed  to 
Gallatin  and  Calhoun.  There  were  three  reasons  for  the 
Whig  support  of  a  policy  of  national  aid  to  internal  im¬ 
provements  :  first,  it  tended  to  bind  the  country  together ; 
second,  it  increased  the  constitutional  functions  of  the 
United  States ;  third,  it  seemed  to  furnish  additional 
reasonsTor  a  high  tariff.  The  second  was  the  main  point 
contended  for.  President  Monroe,  in  1822,  vetoed  a  per¬ 
fectly  unobjectionable,  and  indeed  unimportant,  bill  for 
repairs,  simply  to  assert  his  opposition  to  the  constitu¬ 
tional  principle  involved ;  but  he  afterwards  changed  his 
mind  on  this  very  point. 

Gallatin’s  original  plan  contemplated  an  expenditure 
of  from  sixteen  to  twenty  million  dollars.  He  proposed- 
first,  a  line  of  road  parallel  to  the  coast,  extending  from 
Maine  to  Georgia ;  second,  a  system  of  lines — road  or 
canal — connecting  the  navigable  waters  of  the  coast  with 
those  of  the  Mississippi  valley  ;  third,  three  long  roads 
radiating  from  Washington,  leading  to  Detroit,  St.  Louis, 


1  “  Amer.  State  Papers,”  xx.,  724-921  ;  xxi.,  533. 


I 


28  RAILROAD  TRANSPORTATION. 

and  New  Orleans.  Needless  to  say  no  such  plan  was  car¬ 
ried  out.  Numbers  of  bills  for  national  aid  to  roads  were 
introduced,  and  some  of  them  were  passed  ;  but  they  were 
mere  individual  pieces  of  work,  forming  no  part  of  any 
general  system.  There  was  a  great  deal  of  talk,  and  very 
little  direct  action.  President  Jackson’s  opposition  at  the 
critical  point  was  too  strong  to  be  overcome.1 

The  one  really  important  tangible  result  of  all  this 
agitation  was  the  Cumberland  Road  —  the  “  National 
Pike  ”  from  Washington  to  the  Mississippi  River.  The 
original  bills  ( 1806-8)  provided  for  a  road  from  Cumber¬ 
land  to  Brownsville,  furnishing  direct  and  easy  communica¬ 
tion  between  Washington  and  Wheeling.  In  the  course, 
of  the  next  twenty  years  provision  was  made  for  succes¬ 
sive  extension  to  Columbus,  Vandalia,  and  Jefferson  City. 
The  last  section  was  never  completed.  The  total  expendi¬ 
ture  up  to  1837  was  f°ur  million  three  hundred  thousand 
dollars.2 3 

The  road  system  as  a  matter  of  national  importance  ' is 
a  thing  of  the  past.  The  system  of  internal  water-routes 
is  a  thing  of  the  present  in  more  senses  than  one.  When 
no  longer  used,  its  influence  is  still  felt,  because  it  has  laid 
down  the  lines  of  the  country’s  development. 

The  stream  of  emigration  flowed  from  the  Hudson,  the 
Susquehanna,  or  the  Potomac,  toward  the  great  lakes  on 
the  one  hand,  or  the  Ohio  and  the  Mississippi  valley  on 

1  The  constitutional  point  was  evaded  by  a  distribution  of  the  surplus 
among  the  States.  A  great  deal  of  United  States  money  was  thus  actually 
spent  on  internal  improvements.  For  the  broader  political  aspects  of  the 
question,  see  Alexander  Johnston’s  article  “  Internal  Improvements,”  in 
Lalor's  “  Cyclopedia  of  Political  Economy,”  Chicago,  1881-84.  For  details, 

see  E.  G.  Bourne’s  careful  investigation  of  the  “  History  of  the  Surplus  Reve¬ 
nue  of  1837.”  New  York,  1885. 

3  H.  R.  Reports,  1836-37,  iii. ,  850.  For  a  description  of  travel  on  this 
route,  see  Harper's  Magazine ,  Nov.,  1879. 


UNITED  STATES  INTERNAL  COMMERCE. 


29 


the  other.  The  southwestern  movement  was  at  first  more 
important  than  the  northwestern.  Pittsburg  and  Cincin¬ 
nati,  the  two  main  points  of  transhipment  on  this  route, 
had  become  important  business  centres,  while  Buffalo  and 
Cleveland  were  the  merest  frontier  settlements.  Of  this 
southwest  -movement,  Philadelphia  was  the  natural  start¬ 
ing-point.  After  the  beginning  of  the  present  century, 
the  road  from  Philadelphia  to  Pittsburg  was  fairly  good. 
The  construction  of  the  National  Road  farther  south  does 
not  seem  to  have  seriously  threatened  Philadelphia’s  ad¬ 
vantage  of  position. 

The  change  came  from  another  quarter,  with  the  sub¬ 
stitution  of  canals  for  roads.  The  advantage  was  now  to 
lie  not  with  the  short  route,  but  with  the  level  route. 
And  the  level  route  ran  through  New  York  State.  From 
Alabama  to  New  York  the  chain  of  the  Alleghanies  is  all 
but  unbroken.  In  New  York  on  the  line  of  the  Erie 
Canal  it  is  almost  completely  broken. 

The  first  man  who  really  foresaw  the  future  of  canal 
communication  was  George  Washington.  Even  before 
the  Revolution  he  called  attention  to  the  possibilities  of  a 
canal  westward  from  the  Hudson ;  although  his  main 
efforts,  both  then  and  afterward,  were  directed  toward 
the  establishment  of  communication  on  a  line  much  far¬ 
ther  south,  from  the  Chesapeake  to  the  Ohio.  It  was  at 
first  supposed  that  the  canal  would  run  to  Lake  Ontario 
instead  of  Lake  Erie.  A  company  with  this  object  in 
view  was  formed  in  1792.  It  did  some  rather  ineffective 
work  and  then  became  bankrupt.  In  1808  the  State 
bought  out  whatever  remained  of  this  company ;  in  1810 
the  Erie  Canal  commission  was  appointed  with  De  Witt 
Clinton  at  its  head.  An  effort  was  made  to  secure  na¬ 
tional  aid;  but  Madison  was  unfavorable  to  the  project, 


30 


RAILROAD  TRANSPORTATION . 


and  the  War  of  1812,  for  the  time  being,  put  a  stop  to  all 
action.  At  the  close  of  this  war  New  York  wisely  de¬ 
cided  to  go  on  with  her  own  resources,  without  asking 
national  aid.  Clinton  was  the  life  of  the  whole  move¬ 
ment.  His  “Appeal”  was  published  in  1816.  Work  was 
begun  July  4,  1,817.  The  middle  section  was  completed 
in  1819;  the  Champlain  branch  in  1820;  the  eastern 
section  in  1822.  The  whole  was  finished  in  1825. 1  The 
cost  had  been  five  million  seven  hundred  thousand  dollars. 

Probably  no  one  event  in  the  history  of  the  United 
States  was  hailed  with  such  universal  rejoicing.  And  the 
usefulness  of  the  canal  more  than  justified  expectations. 
Wherever  it  met  a  natural  water-course,  a  city  grew  up 
rapidly — witness  the  rise  of  Syracuse,  Rochester,  and  Buf¬ 
falo.  The  receipts  from  canal  tolls,  $762,000  in  1826,  had 
nearly  doubled  in  1833.  A  reduction  in  rates  of  about 
forty  per  cent,  in  1834  so  increased  business  that  the  total 
receipts  continued  to  grow  almost  as  rapidly  as  before. 
In  1836  arrangements  were  made  for  deepening  and  widen¬ 
ing  the  canal  in  such  a  way  that  the  transportation  itself 
was  cheapened.  In  spite  of  constant  reductions  in  rates, 
the  canal  fund  grew  so  rapidly,  that  in  1845  the  managers  of 
this  fund  were  buying  up  their  bonds  at  twenty  per  cent, 
premium.  In  1852-3  the  tolls  per  ton  were  only  about  one 
third  their  original  figures  ;  the  revenue  was  over  three  mil¬ 
lion  dollars  in  each_year.  From  that  time  forward  begins 
the  history  of  contests  between  canal  and  railroad.  The  use 
of  the  canal  continued  to  increase ;  its  receipts  at  one  time 
also  increased  largely  ;  but  its  commercial  power  slowly 
diminished.  From  1853  to  1859  there  was  a  fight  for 
supremacy  between  canal  and  railroad.  For  twelve  years 
more  there  was  a  contest  for  profits.  Then  it  became  a 


1  “  Tenth  Census,”  iv.,  731,  732. 


UNITED  STATES  INTERNAL  COMMERCE . 


31 


question  whether  the  canal  could  pay  expenses  of  main¬ 
tenance  ;  a  question  which  was  finally  decided  in  the  nega¬ 
tive.1 

The  construction  of  the  Erie  Canal  reduced  transpor¬ 
tation  charges  to  little  over  one  tenth  their  former  figures. 
Branches  were  built  in  rapid  succession.  The  low  rates 
enabled  it  to  compete  for  the  traffic  of  the  Ohio  River 
valley.  Two  canals  connecting  Lake  Erie  with  the  Ohio 
were  built  in  the  years  1825-38,  one  starting  from  Cleve¬ 
land,  the  other  from  Toledo. 

r-1"1-'  ■  '■  . 

Apart  from  the  Erie  Canal  and  its  connections,  the  first 
canals  were  those  for  coal  transportation.  Some  were 
built  in  Pennsylvania  as  early  as  1813.  The  Lehigh  Coal 
and  Navigation  Company  began  its  activity  in  1818-21. 
The  Delaware  and  Hudson  Canal  dates  from  1826.  The 
Morris  Canal  was  begun  about  the  same  time.  More 
general  activity  was  first  called  forth  in  the  years  1830-37. 
The  Pennsylvania  system  of  public  works  established  a 
“  composite  route  ”  of  canal,  railroad,  and  stationary-engine 
service,  which  did  useful  work  in  its  time,  though  quite 
unable  to  compete  with  modern  railroads.  The  canals  of 
Virginia  were  unsuccessful ;  those  of  Indiana  flagrantly 
so.  Some  of  the  worst  of  these  works  were  more  or  less 
directly  encouraged  by  subsidies  from  the  United  States.2 3 

The  crisis  of  1837  put  a  complete  stop  to  speculative 
canal  building.  For  the  time  being  it  was  impossible  to 
continue  these  works  at  all ;  and  when  the  country  had  in 
some  measure  recovered,  it  was  felt,  in  the  first  place,  that 

1  See  chapter  vi.  For  details  see  successive  N.  Y.  State  reports  of  the 

Auditor  of  the  Canal  Department,  the  State  Engineer,  and  special  com¬ 
missions. 

3  Besides  the  distribution  of  the  surplus  (see  Bourne,  “  History  of  the 
Surplus  Revenue  of  1837  ”),  there  were  4,000,000  acres  of  land  granted  to 
canals  or  in  aid  of  canal  construction. 


32 


RAILROA  D  TRAN SP OR  TA  TION. 


these  systems  of  public  works  had  done  more  harm  than 
good  ;  and,  secondly,  that  the  chief  means  of  internal 
communication  was  not  to  be  water,  but  rail.  Some  local 
canals,  chiefly  coal  canals,  continued  to  be  of  service  to 
local  traffic.  Two  great  systems  of  water  communication — 
the  Lakes  and  Erie  Canal  on  the  north,  the  Mississippi 
River  on  the  south — have  continued  to  wage  a  more  or 
less  equal  contest  with  the  great  railroad  systems  of  the 
present  day.  The  history  of  these  contests  belongs  to  a 
subsequent  chapter. 


Before  the  canal  mania  reached  its  height,  railroad 


building  had  begun  almost  simultaneously  at  half  a  dozen 


different  points.  The  idea  took  root  most  suddenly. 
There  had  been  no  such  previous  series  of  experiments 
with  horse  railroads  as  in  England.  The  Quincy  tram- 
road  1  (1S27),  by  which  stone  was  hauled  for  the  Bunker 
Hill  Monument,  is  hardly  important  enough  to  be  noted 
as  an  exception.  Of  somewhat  greater  importance  were 
the  Mauch  Chunk  Railroad,  completed  in  the  autumn  of 

1827,  and  the  Carbondale  and  Honesdale,  built  by  the 
Delaware  and  Hudson  Canal  Company,  and  opened  in 

1828.  The  first  locomotive  seen  in  America  was  imported 
from  England  for  the  use  of  this  road.2  But  these  roads, 
and  one  or  two  others  immediately  following  them,  were 
built  for  special  purposes  rather  than  for  general  public 
use. 

The  honor  of  taking  the  lead  in  the  construction  of  a 
full-fledged  railroad  may  fairly  be  given  to  Maryland. 
The  Baltimore  and  Ohio  was  really  the  pioneer  railroad. 


It  was  chartered  in  1827  and  begun  in  1828.  The  first 


1  Adams  :  “  Railroads,”  pp.  37-39. 

2  It  did  not  serve  its  purpose.  W.  H.  Brown  :  “  Hist,  of  First  Locomo¬ 
tives,”  pp.  74-92. 


UNITED  STATES  INTERNAL  COMMERCE. 


33 


section,  fifteen  miles  in  length,  was  opened  in  the  begin¬ 
ning  of  the  year  1830.  Horse-power  and  even  sails  were 
at  first  tried  as  means  of  propulsion.  It  was  not  until  the 
latter  part  of  1831  that  steam  was  definitely  chosen  for 
the  motive  power. 

The  early  railroads  were  like  modern  street  railroads  in 
their  construction.  That  is  to  say,  instead  of  having  trans¬ 
verse  sleepers,  they  were  laid  upon  heavy  wooden  beams  or 
sills,  placed  lengthwise.  These  beams  were  the  real  sup¬ 
porting  power ;  the  rail  was  simply  a  flat  strip  of  iron,  to 
protect  the  underlying  wood  from  wear.  The  first  locomo¬ 
tives,  imported  from  England,  were  found  too  heavy  to  be 
borne  by  a  road  thus  constructed.  There  was  also  much 
delay  in  their  arrival.  America  almost  immediately  began 
to  manufacture  her  own  locomotives  ;  the  West  Point 
Foundry  Works  taking  the  lead  in  this  matter.1 

By  the  close  of  the  year  1835,  the  Baltimore  and  Ohio 
with  the  Washington  branch  had  attained  a  length  of 
one  hundred  and  fifteen  miles.  Pennsylvania  had  been  in 
some  respects  still  more  active,  her  railroads,  chiefly  coal 
roads,  having  attained  the  highly  respectable  length  of 
about  two  hundred  miles2 — one  quarter  of  the  whole 
mileage  of  the  United  States  at  the  time.  South  Caro¬ 
lina  had  one  hundred  and  thirty-seven  miles  open  for 
traffic  ;  Massachusetts,  New  York,  and  New  Jersey,  not 
far  from  one  hundred  miles  each.  The  remaining  roads 
were  chiefly  in  Virginia.  Railroad  extension  was  not  seri¬ 
ously  checked  by  the  crisis  of  1837.  In  one  sense  it  may 
have  been  helped  rather  than  hindered  ;  for  as  the  building 
of  new  canals  was  given  up,  the  necessity  of  new  railroads 
was  all  the  more  apparent. 

1  Brown  :  “  Locomotives,”  145,  159  ff. 

*  Including  some  private  railroads  not  mentioned  in  the  United  States 
Census  returns. 


34 


RAILROAD  TRANSPORTATION. 


The  most  rapid  growth  centred  around  Philadelphia. 
To  the  northwest  was  a  system  of  coal  roads.  The  first  of 
them  were  mere  private  lines  connecting  mining  properties 
with  points  of  shipment  by  water.  In  1833  the  Phila¬ 
delphia  and  Reading  Railroad  was  chartered  ;  it  was  opened 
in  1838.  Farther  to  the  south,  directly  west  of  Phila¬ 
delphia,  was  a  line  of  State  railroad  opened  in  1834.  This 
was  part  of  the  composite  route  already  mentioned.  The 
Pennsylvania  Railroad  itself  was  not  chartered  till  1846. 
The  west  end  of  the  Camden  and.  Amboy  route  was 
opened  as  early  as  1832-34.  Regular  communication 
with  New  York  was  established  in  1839.  A  year  before 
this  the  Philadelphia,  Wilmington,  and  Baltimore  Rail¬ 
road,  chartered  in  1831-2,  had  been  opened  to  Balti¬ 
more.1 

The  Baltimore  and  Ohio  advanced  but  slowly  after  1835. 
More  activity  was  displayed  farther  South.  By  the  year 
1840  there  seems  to  have  been  a  continuous  line  of  rail 
open  from  Fredericksburg  via  Richmond  to  Wilmington. 
The  first  section  built — that  between  Petersburg  and 
Weldon,  thirty-one  years  later  the  object  of  such  hard 
fighting, — was  opened  in  1833.  South  Carolina  had  been 
still  more  enterprising.  The  Charleston  and  Hamburg 
Railroad,  one  hundred  and  thirty-seven  miles  in  length, 
was  chartered  in  1829.  When  opened  in  1833  it  was  the 
longest  line  of  railroad  under  one  management  in  the  world. 
A  number  of  branches  were  built  in  the  years  succeeding 
1840 ;  while  Georgia  was  developing  a  well-planned  system 
of  railroads  under  State  ownership.  State  aid  in  various 
forms  was  quite  prevalent  in  the  South  at  this  time  ;  the 

1  These  and  subsequent  figures  are  obtained  by  a  comparison  between  the 
historical  matter  in  Poor’s  “Manual”  and  “History”  (New  York,  i860), 
and  the  returns  in  the  Tenth  Census,  iv.,  301-387  (bottom  figures). 


UNITED  STATES  INTERNAL  COMMERCE. 


35 


policy  had  been  stimulated  if  not  started  by  the  distribu¬ 
tion  of  the  surplus  in  the  United  States  Treasury.  In 
Georgia  and  South  Carolina  it  was  done  with  profit  and 
success.  Elsewhere  it  was  not  so  well  applied.  1 2 

The  earliest  New  York  railroads  were  built  near  Albany. 
The  Mohawk  and  Hudson  (Albany  and  Schenectady)  was 
opened  in  1831  ;  the  Saratoga  and  Schenectady  in  1832  ; 
the  Rensselaer  and  Saratoga  in  1835.  The  New  York 
Central  route  was  opened  to  Utica  in  1836,  and  to  Buffalo, 
by  a  somewhat  devious  line,  in  1842,  though  the  consoli¬ 
dation  of  the  different  sections  did  not  take  place  till 
eleven  years  afterward.  Meantime  the  Harlem  Railroad 
had  been  opened,  and  many  other  roads  were  well  under 
construction,  notably  the  Erie,  which  had  received  liberal 
assistance  from  the  State.  The  main  line  of  the  Erie 
was,  however,  not  opened  through  its  whole  length  till  1851. 

Three  Massachusetts  railroads  from  Boston  toward 
Providence,  Worcester,  and  Lowell  respectively,  were 
opened  almost  simultaneously  in  18.^  5. 8  The  whole  line 
of  the  Boston  and  Albany  was  completed  in  1842.  This 
railroad  has  the  distinction  of  being  the  first  road  operated 
as  an  important  through  route,  and  not  merely  supported 
by  local  traffic.  It  was  not  the  only  instance  of  continu¬ 
ous  railroad  connection.  There  was  already  an  almost 
continuous  line  from  New  York  to  North  Carolina.  A 
rail  connection  from  Albany  to  Buffalo  was  on  the  point 
of  completion.  But  each  of  these  was  simply  a  succes¬ 
sion  of  local  lines  managed  for  local  interests,  while  the 
Boston  and  Albany  was  built  with  some  conscious  idea, 
though  an  imperfect  one,  of  the  work  that  it  was  to  do  in 
the  future. 


1  Bourne  :  “  History,”  chapters  vi-xi. 

2  Adams  :  “  Railroads,”  pp.  52-79. 


36 


RAILROAD  TRANSPORTATION . 


The  years  1840-1850  formed  a  period  of  rapid  railroad 
construction  in  New  England — more  rapid  than  it  was  in 
any  other  section  of  the  country  during  that  decade, 
and  more  rapid  than  it  has  been  in  New  England 
during  any  subsequent  decade.  If  we  look  at  the  rail¬ 
road  map  of  the  United  States  in  the  year  1850,  we  find 
that  the  New  England  system  has  developed  its  main 
outlines ;  that  the  Middle  and  South  Atlantic  States  have 
seized  the  idea  of  their  lines  of  development,  but  have  not 
as  yet  carried  it  out,  while  the  States  of  the  Mississippi 
valley  are  just  making  their  first  experiments  in  railroad 
construction.  In  Ohio,  part  of  the  Cincinnati,  Sandusky, 
and  Cleveland  had  been  built  about  1837.  But  it  had  for 
a  long  time  stood  alone.  It  was  not  until  1848  that 
through  rail  communication,  by  any  route  whatever,  was 
secured  from  Cincinnati  to  the  lakes. 

After  the  year  1850,  railroad  construction  in  New  Eng¬ 
land  diminished,  while  in  other  parts  of  the  country  it 
increased  rapidly.  The  Middle  and  South  Atlantic  States 
in  the  next  seven  years  filled  out  the  skeleton  of  railroads 
which  they  had  previously  possessed.  The  group  of 
States  east  of  the  Mississippi  in  the  same  period  laid 
down  the  main  lines  of  its  subsequent  development.  The 
Cleveland,  Columbus,  and  Cincinnati  line  was  opened  in 
1851  ;  the  Cleveland  and  Pittsburg  in  1852.  In  the  same 
year  the  Michigan  Central  and  Michigan  Southern  lines 
were  both  opened.  The  connecting  link  between  Cleve¬ 
land  and  Toledo  was  opened  in  the  next  year,  furnishing 
through  rail  communication  to  Chicago.  In  1854  this  was 
extended  westward  as  far  as  the  Mississippi  via  the  Chi¬ 
cago  and  Rock  Island.  The  Chicago  and  Galena,  the 
nucleus  of  the  Northwestern  system,  was  opened  in  1855, 
followed  in  quick  succession  by  the  Chicago  and  Alton  ; 


UNITED  STATES  INTERNAL  COMMERCE. 


37 


Chicago,  Burlington,  and  Quincy ;  and  Illinois  Central. 
The  Ohio  and  Mississippi,  from  Cincinnati  to  St.  Louis, 
was  opened  about  the  same  time.  The  first  line  to  reach 
the  Missouri  was  the  Hannibal  and  St.  Joseph  in  1858. 

The  rapid  extension  of  railroads  in  the  West  and  South 
at  that  time  was  favored  by  the  policy  of  land  grants.1 
The  Illinois  Central  was  the  first  railroad  aided  in  this 

4  1  — ■  ■  ■■■■■  ■  ■  -■ 

way,  although  such  grants  in  favor  of  roads  and  canals 
had  not  been  uncommon  in  the  time  preceding  the  crisis 
of  1837.  "The  Illinois  Central  scheme  was  first  proposed 
as  far  back  as  1836  ;  but  it  was  not  until  1850-5 1  that  it 
received  its  land  grant ;  similar  grants  being  at  the  same 
time  made  to  Mississippi  and  Alabama  in  behalf  of  the 
Mobile  and  Ohio  Railroad.  The  example  was  followed 
only  too  speedily  in  other  States;  in  1852  in  Missouri,  in 
1853  in  Arkansas,  in  1856  in  Michigan,  Wisconsin,  Iowa 
on  the  one  hand,  in  Florida  and  Louisiana  (besides 
additional  grants  in  Alabama  and  Mississippi)  on  the 
other.  The  sectional  interests  of  North  and  South  were 
played  off  against  one  another  in  this  scramble  for  spoils. 
Eight  million  acres  were  granted  under  Fillmore,  nineteen 
million  under  Pierce. 

The  crisis  of  1857  put  an  effective  stop  to  new  railroads, 
especially  in  the  West  ;  and  land-grant  projects  ceased  at 
the  same  time.  The  war  then  stopped  railroad  building 
still  more  completely.  But  instead  of  stopping  land 
grants,  it  gave  them  a  new  field  and  a  wider  scope.  Before 
the  war  these  grants,  with  unimportant  exceptions,  had 
been  made  to  the  States  and  by  them  to  the  railroads. 
Now  began  a  system  of  direct  grants  of  territorial  lands 
on  a  scale  hitherto  unknown.  A  railroad  to  California 

1  Forty-sixth  Cong.,  3d  Sess.,  H.  R.  Ex.  Doc.,  47,  part  iv.  (Report  of  the 
Land  Commission). 


33 


RAILROAD  TRANSPORTATION. 


was  a  political  necessity,  to  be  obtained  at  almost  any 
price.  The  Union  1 * 3  and  Central  Pacific  railroads  received 
what  was  virtually  intended  as  a  money  subsidy  of  over 
twenty-five  thousand  dollars  a  mile,  and  land  grants  aggre¬ 
gating  over  thirty  million  acres.  The  Northern  Pacific 
failed  to  get  an  expected  money  subsidy,  but  received  in¬ 
stead,  just  before  the  close  of  the  war,  a  double  allowance 
of  land — forty-eight  million  acres  in  all.  With  the  restora¬ 
tion  of  peace,  the  urgent  political  necessity  ceased,  but 
not  the  grants  of  land.  New  grants  were  made  in  the 
Northwest,  on  a  scale  exceeding  that  of  ten  years  before. 
In  the  South  the  forfeited  grants  were  renewed,  and  new 
ones  added.  In  the  extreme  Southwest  new  routes  to 
the  Pacific  were  richly  endowed.  Where  gifts  of  lands 
were  impossible  or  insufficient,  towns  and  counties,  in 
East  and  West  alike,  vied  with  one  another  in  subscribing 
to  the  securities  of  new  railroads.  For  the  upper  Missis¬ 
sippi  valley  in  particular  the  years  1868-72  were  the  years 
of  rapid  railroad  development 

The  causes  which  led  to  the  crisis  of  1873  and  the 
depression  which  followed  it,  the  speculation  of  the  years 
1880-82,  and  the  crisis  of  1884,  must  be  treated  elsewhere.9 
Railroad  extension  in  the  five  years  1874-78  was  confined 
within  as  narrow  limits  as  possible.  In  1879  it  began  to 
revive ;  and  the  four  succeeding  years  did  for  the  South¬ 
western  States  and  for  the  Rocky  Mountain  region  what 
the  years  1869-72  did  for  the  upper  Mississippi  valley. 
The  increase  in  these  groups  during  four  years  was  126 
and  168  per  cent,  respectively;  while  in  the  country  east 
of  the  Mississippi  it  was  only  twenty-four  per  cent.8 

1  On  the  history  of  the  Union  Pacific  Railroad  at  this  period,  see  J.  B. 
Crawford  :  “  The  Credit  Mobilier  of  America.”  Boston,  1880. 

a  Chapter  iii. 

3  For  detailed  history  see  Railroad  Gazette,  1884,  pp.  568,  586. 


UNITED  STATES  INTERNAL  COMMERCE . 


39 


These  years  will  undoubtedly  be  remembered  as  the 
period  of  the  building  of  the  great  trans-continental 
routes,  which  had  been  chartered  in  the  earlier  period  of 
speculation,  but,  with  the  exception  of  the  Central  Pacific, 
had  been  forced  to  await  the  second  wave  of  speculation 
before  they  could  be  completed. 

The  mere  external  history  is  but  the  smallest  part  of 
any  account  of  railroad  development  in  the  United  States. 
The  internal  history  of  railroads,  their  organization  and 
management,  presents  problems  of  far  deeper  interest  and 
importance.  There  are  distinct  questions  affecting  the 
relations  of  railroads  to  their  owners,  to  one  another,  to 
their  patrons,  and  to  the  government.1  They  have  been 
rapidly  developing  side  by  side,  in  one  sense  independent, 
in  another  sense  closely  connected.  .  They  involve  some 
of  the  most  serious  problems  of  modern  industrial  life. 
To  understand  the  relations  of  railroads  to  their  owners, 
we  must  study  the  growth  of  corporations,  the  modern 
forms  of  speculation,  the  history  of  commercial  crises. 
In  the  relations  of  railroads  to  pne  janother_  and  their 
patrons,  tfiere  are  involved  not  merely  questions  of  trade 
geography,  but  questions  of  industrial  principle,  of  com¬ 
petition  and  combination,  of  monopoly  and  its  effects. 
And  finally,  in  the  relation  of  railroads  to  the  government, 
there  are  political  questions  involved  which  have  already 
become  important,  and  which  are  destined  to  be  of  far 
greater  importance  in  the  immediate  future. 

1  In  this  enumeration  we  have  omitted  an  equally  important  class  of  ques¬ 
tions,  which  lies  outside  of  the  scope  of  this  book — the  relations  of  railroads 
to  their  employees,  which  are  barely  touched  upon  in  chapter  vii.  To  treat 
them  with  the  thoroughness  which  they  deserve  would  require  a  book  by 
itself. 


CHAPTER  III. 


RAILROAD  OWNERSHIP  AND  RAILROAD  SPECULATION. 

Distinctive  features  of  railroad  business — Corporate  ownership — Its  present 
extent — Past  history — Good  and  evil  connected  with  it — Speculation — 
Commercial  crises — Events  preceding  the  crisis  of  1884 — Speculative 
railroad  building  and  its  results — Attempts  to  control  it — Railroad 
accounts — The  income  account  and  the  general  balance  sheet — Diffi¬ 
culty  of  separating  maintenance  from  construction — How  far  railroad 
reports  can  be  serviceable  to  the  investors. 

UNTIL  about  1850,  it  was  assumed  that  railroad  business 
was  subject  to  the  same  laws  as  any  other  business,  and 
in  particular  to  the  so-called  law  of  competition,  by  whose 
free  action  rates  would  be  brought  down  to  cost  of  service. 
It  was  gradually  seen  that  this  assumption  was  not  strictly 
true ;  that  in  many  instances  it  was  very  far  from  the 
truth.  1  _  *'}  -A 

A  railroad  differs  from  many  other  business  enter¬ 
prises,  in  the  existence  of  a  large  permanent  investment, 
which  can  be  used  for  one  narrowly  defined  purpose,  and 
for  no  other.  The  capital,  o_ncq  invested,  must  remain. 
It  is  worth  little  for  any  other  purpose  than  the  one  in 
question.  A  railroad  cannot  contract  its  capital  merely 
because  it  does  not  pay ;  nor  can  it  be  paralleled  at  short 
notice  when  it  happens  to  pay  remarkably  well.  In  these 
respects  it  differs  quite  sharply  from  a  bank  or  store ;  and, 
to  a  certain  extent,  from  a  factory.  The  different  lines  of 
business — bank,  store,  factory,  railroad — form  a  series,,  at 
one  end  of  which  we  have  an  elastic  business  capital, 


40 


RAILROAD  OWNERSHIP  AND  SPECULATION.  41 

which  can  be  readily  expanded  or  contracted,  while  at 
the  other  end  we  have  a  large  permanent  investment  of 
“  fixed  ”  capital,  which  cannot  thus  adapt  itself  to  the 
wants  of  trade.  This  is  why  it  is  so  often  said  that  the 
ordinary  laws  of  political  economy  do  not  operate  in  the 
case  of  railroads.1  The  early  political  economists  were 
for  the  most  part  men  who  had  made  a  special  study  of 
banking  business.  David  Ricardo,  the  man  who  did  more 
than  any  one  else  to  give  English  political  economy  its 
present  shape,  was  himself  by  profession  a  banker.  He 
was  thus  led  to  treat  capital  as  something  not  fixed,  but 
freely  circulating,  which  could  be  at  once  withdrawn  from 
a  business  when  it  became  unprofitable.  In  the  case  of  a 
factory  this  is  by  no  means  true ;  in  the  case  of  a  railroad 
it  is  absolutely  untrue. 

This  large  perman^ent  ijwestment  necessarily  affects  the 
relations  of  a  railroad  to  its  owners,  to  its  users,  and  to 
the  law.  It  is  owned,  almost  of  necessity,  by  a  corpora¬ 
tion.  As  concerns  the  users,  it  is  almost  necessarily  a 
monopoly.  Very  few  points  have  the  benefit  of  more 
than  one  line  of  road ;  even  at  these  points  it  is  often 
easy  to  come  to  an  agreement.  In  all  these  cases,  com¬ 
petition  is  not  directly  felt.  When  a  railroad  makes  arbi¬ 
trary  rates,  whether  justified  or  not,  there  is  no  appeal 
to  any  controlling  influence.  The  attempt  is  therefore 
constantly  made  to  bring  the  railroads  under  the  authority 
of  special  legislation.  There  is  no  lack  of  grounds  on 
which  to  base  such  special  action.  Corporate  existence  in 
itself  renders  a  certain  amount  of  legal  control  necessary. 
Common  carriers  have  from  time  immemorial  been  made 
subject  to  special  responsibility.  When  a  single  carrier,  or 
a  very  few  of  them,  have  a  virtual  monopoly  of  the  whole 


1  Adams  :  “  Railroads,”  p.  81. 


42 


RAILROAD  TRA  NSPOR  TA  TION. 


business,  this  responsibility  needs  to  be  still  more  strictly 
enforced.  This  was  the  doctrine  of  the  United  States 
Supreme  Court  in  the  Granger  cases,  in  which  the  re¬ 
served  police  power  of  the  State  was  so  strongly  asserted.1 
The  railroads  themselves  recognize  their  peculiar  position 
under  the  law,  in  claiming  to  exercise  the  right  of  eminent 
domain  to  take  land  without  the  owner’s  consent.  If  they 
get  the  benefit  of  their  character  as  a  “  public  use,”  they 
must  accept  the  drawbacks  which  that  character  involves. 

Finally,  the  chief  practical  reason  why  so  much  special 
legislation  is  directed  against  railroads,  is  that  we  are 
dealing  with  a  new  business,  without  the  benefit  of  estab¬ 
lished  precedents  in  its  favor.  The  public  is  jealous  of 
the  railroad  power.  It  will  not  allow  it  to  manage  its 
business  without  interference,  because  it  is  afraid  that  it 
will  grow  so  strong  that  all  interference  will  be  impossible. 
The  public  sees  no  limit  to  the  growing  power  of  corpo¬ 
rations,  and  it  regards  this  growth  with  a  kind  of  vague 
fear.  This  fear  is  none  the  less  potent  because  men  are 
at  a  loss  to  tell  exactly  what  they  are  afraid  of.  It  gives 
rise  to  much  wild  talk,  and  some  ill-judged  legislation. 

These  manifestations  drive  some  men  to  the  opposite 
extreme.  Because  the  fear  is  vague,  they  insist  that  it 
is  groundless.  Because  the  talk  is  wild,  they  insist  that 
it  is  much  ado  about  nothing.  Because  the  legislation  is 
ill-judged,  they  insist  that  no  legislation  is  needed. 

Either  extreme  is  bad.  It  is  not  well  to  be  frightened 
at  the  growth  of  corporate  power ;  but  it  is  not  well  to 
shut  our  eyes  to  the  plain  fact  of  the  case.  Not  far  from 
one  quarter  of  the  wealth  of  the  United  States  is  held  by 
trading  corporations..  It  is  not  improbable  that  half  the 
permanent  business  investment  of  the  country  is  owned 


1  Munn  vs.  Illinois,  94  U.  S.,  113. 


RAILROAD  OWNERSHIP  AND  SPECULATION.  43 


in  this  way.1 *  It  is  certain  that,  not  in  the  United  States 
only,  but  in  the  whole  civilized  world,  corporate  property 
is  increasing  many  times  faster  than  other  forms  of 
wealth.3  It  is  safe  to  say  that,  amid  the  many  important 
business  changes  of  the  present  century,  this  sudden 
growth  of  corporations  is  the  most  important. 

So  rapid  has  been  the  change  that  men’s  thoughts  have 
been  hardly  able  to  adapt  themselves  to  it  ;  still  less  has 
the  law  been  able  to  keep  pace  with  it.  The  change  has 
brought  evils  and  dangers,  previously  unknown,  and  even 
now  imperfectly  understood.  Against  these  dangers,  old 
safeguards  have  proved  useless ;  new  legislation,  based  on 
a  merely  superficial  view  of  the  facts,  has  proved  worse 
than  useless.  If  our  remedies  are  to  be  of  any  avail,  they 
must  be  based  on  a  thorough  understanding  of  the  evils 
against  which  they  are  directed.  To  understand  the  evils, 
we  must  understand  the  character  of  the  system,  and  the 
causes  which  have  led  to  its  growth. 

The  distinctive  feature  of  the  modern  trading  corpora¬ 
tion  is  the  limited  liability  of  its  members. 

1  Using  the  words  “permanent  investment  ”  in  a  somewhat  narrow  sense, 
to  exclude  the  value  of  land  itself — which  though  a  permanent  investment 
on  the  part  of  many  individual  holders,  is  from  the  standpoint  of  the  com¬ 
munity  mostly  capitalized  rental  value.  The  wealth  of  the  country  as  esti¬ 
mated  in  the  United  States  Census  of  1880,  vii.,  p.  n,  is  found  to  be  forty- 
three  to  forty-six  thousand  million  dollars  ;  probably  from  sixteen  to  eighteen 
thousand  million  should  be  classed  as  permanent  investment.  It  is  probable 
that  on  this  basis  of  valuation  the  total  amount  of  corporate  property  amounted 

to  ten  or  twelve  thousand  million  dollars,  about  three  fourths  of  which  should 
be  classed  as  permanent  investment.  But  these  figures  are  very  uncertain. 

3  Here  we  stand  on  surer  ground  in  making  our  estimates.  It  is  not 
probable  that  in  the  years  from  1870  to  1880  the  total  wealth  of  the  world 
increased  much  more  than  ten  per  cent.  But  the  use  of  machinery,  as  indi¬ 
cated  by  the  consumption  of  coal  and  iron,  increased  from  forty  to  fifty  per 
cent. ;  and  the  railroads  of  the  world  increased  seventy-five  per  cent.  See 
Mulhall :  “Balance  Sheet  of  the  World,  1870-1880”;  Neumann  Spallart : 
“  Uebersichten,”  1884,  pp.  266-289,  439* 


44 


RA ILR  OA  D  TRA  NSPOR  TA  TION. 


This  is  what  distinguishes  it  from  a  partnership.1  If  a 
man  puts  a  thousand  dollars  into  a  partnership,  and  the 
firm  contracts  debts  in  excess  of  its  resources,  he  may  be 
called  upon  to  pay  many  thousands  more  to  satisfy  the 
claims  of  creditors.  But  if  he  puts  his  thousand  dollars 
into  railroad  stock,  he  is  quit  of  all  further  responsibility. 
His  liability  is  limited  to  the  amount  of  his  original  in¬ 
vestment.  If  the  company  is  well  managed  he  will  get 
his  dividends.  If  it  is  badly  managed  he  will  probably 
lose  his  money.  But  in  no  case  can  he  be  compelled  to 
pay  more  than  the  face  value  of  his  stock  subscription. 
If  the  liabilities  of  the  company  exceed  its  resources,  that 
is  the  creditors*  look-out.  They  can  take  possession  of 
the  concern  arid  run  it  to  suit  themselves ;  but  they  have 
no  further  claims  against  the  individual  stockholders. 

What  is  true  of  railroad  stock  is  generally  true  of  manu¬ 
facturing  stocks,  and  partially  true  of  the  stock  of  banks 
and  other  trading  corporations.  The  liability  of  the  indi¬ 
vidual  stockholders  is  in  each  case  accurately  defined  by  law. 

In  this  resuect  the  corporations  of  to-day  are  sharply 
distinguished  from  those  of  the  middle  ages.  The  mem¬ 
ber  of  a  mediaeval  guild  did  not  lose  one  jot  of  his  liability 
for  what  the  corporation  might  do.  His  whole  person¬ 
ality  was  bound  up  in  the  corporation.  He  ceased  to 
have  an  individual  existence  apart  from  it.  John  Smith, 
A.  D.  1300,  was  not,  primarily,  a  citizen  of  England,  but  a 
member  of  the  guild  of  smiths  in  the  city  of  London, 
which  city  was  a  member  of  the  English  body  politic. 
Whether  he  wrought  or  fought,  he  did  it  not  as  a  free-born 
Englishman,  but  as  a  Smith  of  London.  Any  analogy 
between  the  mediaeval  guild  and  the  modern  corporation 


1  This  is  of  course  not  intended  as  a  legal  definition  (compare  Taylor  on 
Corporations,  chaps,  iii.,  iv.,)  but  as  a  popular  statement  of  facts. 


RAILROAD  OWNERSHIP  AND  SPECULATION.  45 


is  almost  always  misleading.1 2  The.jormer  was  an  associ¬ 
ation  asserting  its  claims  in  every  direction  while  the 
state  was  still  weak.  The  latter  is  an  association^ estab¬ 
lished  for  specific  purposes  by  a  state  which  has  become 
strong  enough  to  protect  the  association  in  its  privileges, 
and  to  limit  it  to  the  purposes  for  which  it  was  organized. 

The  first  corporation  of  the  modern  type  was  a  bank 
chartered  at  Genoa,  in  1407,  for  the  purpose  of  funding 
the  national  debt  of  that  city.3  The  next  important  in¬ 
stances  were  the  great  merchant  shipping  companies  of 
Holland,  England,  and  France,  of  which  the  English  East 
India  Company  has  been  the  most  famous.  The  first  of 
these  was  chartered  about  the  year  1600.  This  form  of 
organization  grew  in  public  favor  for  a  hundred  years. 
Then  the  wild  speculations  connected  with  John  Law’s 
bank  in  France  in  1720,  and  the  “South,  Sea  Bubbles’1  in 
England,  at  the  same  date,  produced  a  reaction,  and  the 
development  of  corporate  business  was  checked  until  after 
the  close  of  the  Napoleonic  wars.  Their  really  rapid 
growth  dates  from  1815. 

There  is  a  necessity  for  such  corporations  in  the  nine¬ 
teenth  century  which  did  not  exist  in  the  eighteenth. 
The  development  of  the  steam-engine  has  caused  large 
enterprises  to  take  the  place  of  small  ones.  The  era  of 
large  factories  began  about  1815  ;  that  of  railroads  in  1830. 
In  two  generations  we  have  seen  an  investment  of  over 
$30,000,000,000  in  applied  steam  power.3 

The  work  was  indispensable, — butrwhere  was  the  money 

1  J.  E.  Thorold  Rogers  :  “  Six  Centuries  of  Work  and  Wages,”  London  and 
New  York,  1884,  pp.  106-113. 

2  F.  Ivleinwachter  in  Schonberg's  “  Handbuch  der  politischen  Oekonoxnie,” 
pp.  197,  198.  Tubingen,  1S82. 

8  Engel :  “  Zeitschrift  des  Konigl.  Preuss.  Stat.  Bureaus  ”  (Berlin),  1880, 

p.  121. 


4  6 


RAILROAD  TRANSPORTATION. 


to  come  from  ?  The  largest  fortunes  of  half  a  century 
ago  were  inadequate  to  meet  the  demands  of  the  factory 
and  railroad  systems,  even  if  their  owners  had  been  in¬ 
clined  to  take  the  whole  risk  of  these  untried  enterprises. 
On  the  other  hand,  the  small  capitalists  needed  just  such 
a  chance  of  investing  their  savings,  provided  it  could 
be  done  without  undue  danger.  The  investment  needed 
the  small  capitalist,  and  the  small  capitalist  needed  the 
investment.  The  problem  was  solved  by  applying  the 
system  of  limited  liability  to  all  these  undertakings.  The 
modern  form  of  corporation  prevailed  because  it  was 
found  to  be  the  best  form  of  ownership  for  the  large  per¬ 
manent  investments  under  concentrated  management 
which  are  required  in  modern  industry. 

This  result  was  not  reached  off-hand.  Many  people 
were  violently  opposed  to  the  new  system.  It  gradually 
forced  itself  into  public  favor,  because  the  communities 
which  refused  to  adopt  it  got  very  little  good  and  a  great 
deal  of  harm  from  their  refusal.  The  laws  of  Massa- 
chusetts  sixty  years  ago  were  unfavorable  to  joint-stock 
enterprise.  Capital  was  thereby  driven  into  other  States 
for  investment.  The  growth  of  Massachusetts  business 
was  hindered,  and  its  character  was  not  really  helped. 
The  final  result  was  that  the  laws  had  to  be  modified.1 

The  case  of  England  was  still  more  marked.  In  the  re¬ 
action  from  the  speculations  of  1720  the  principle  had 
been  adopted  that  limited  liability  should  be  granted  only 
by  special  charter  from  Parliament.  The  result  was  an 
infinite  amount  of  expense  and  jobbery  at  this  point. 
Whether  an  enterprise  received  its  charter,  depended 

1  Angell  and  Ames  on  Corporations  (gth  Ed.,  Boston,  1871),  pp.  607- 
610.  Amer.  Jurist,  4,  307.  For  the  history  of  the  “  General  Railroad  Law” 
see  chapter  vii. 


RAILROAD  OWNERSHIP  AND  SPECULATION.  47 


quite  as  much  upon  the  skill  of  its  lobbyist  as  upon  the 
soundness  of  its  prospects.  The  smaller  undertakings 
could  not  go  to  the  expense  of  securing  special  charters. 
Too  often  they  were  thus  thrown  out  of  the  hands  of  bona 
fide  investors,  and  into  the  hands  of  those  who,  having  little 
to  lose,  had  little  to  fear.  Speculation  was  thus  fostered 
by  the  laws  which  were  meant  to  restrain  it.  One  after 
another  these  laws  had  to  bej-ejDeakd.1  Some  of  the  ob¬ 
noxious  provisions  still  remain  ;  but  the  failure,  in  L8.78, 
of  the  City  of  Glasgow  Bank,  which  was  organized  under 
the  old  system,  gave  the  death-blow  to  that  system. 
Hundreds  of  small  investors  were  irretrievably  ruined  ; 
and  this  fact  did  more  than  any  amount  of  talk  would 
have  done  to  show  the  folly  of  sending  the  investor  to 
the  poor-house  in  order  to  protect  the  creditor  from  any 
loss  whatsoever.  The  small  investor  is  a  necessity  of 
modern  industry  ;  and  the  modern  form  of  corporation 
has  been  found  the  one  available  means  to  encourage  and 
protect  him.  The  fact  that  it  was  adopted  reluctantly 
makes  the  proof  of  its  necessity  all  the  stronger. 

In  laying  stress  upon  the  necessity  of  corporations  in 
their  present  form,  we  do  not  pretend  that  they  have 
been  productive  of  unmixed  good.  On  the  contrary, 
their  growth  has  been  attended  with  evils  and  dangers  at 
every  step.2  There  are  evils  involved  in  the  existence  of 
large  permanent  investments  of  any  kind.  There  are 
other  evils  involved  in  the  corporate  ownership  of  such 
investments.  Some  abuses  are  connected  with  the  busi¬ 
ness  management  of  a  railroad  or  a  factory,  simply  be¬ 
cause  it  is  a  railroad  or  a  factory ;  others  are  due  to  the 
fact  that  it  is  owned  and  managed  by  a  joint-stock  com- 

1  Kleinwachter,  pp.  201,  202. 

2  Simon  Sterne  :  “  The  Corporation  :  Its  Benefits,  its  Evils.”  New  York, 
1880. 


48 


RAILROAD  TRANSPOR  TA  T1 OM. 

pany.  The  former  cause  is  more  important  than  the 
latter.  Many  of  the  evils  attributed  to  joint-stock  owner¬ 
ship  are  due  to  the  character  of  the  enterprise  rather  than 
to  the  way  in  which  it  is  owned,  and  show  themselves  just 
as  strongly  in  enterprises  of  the  same  kind  which  are  owned 
and  managed  by  individuals.  Some  of  these  evils  affect 
the  general  public.  Others  more  directly  affect  the  investor. 
It  is  with  the  latter  class  that  we  are  at  present  concerned  ; 
a  class  of  evils  which  may  be  included  under  the  somewhat 
vague  name  of  speculation. 

Speculation,  in  the  narrowest  sense  of  the  word,  isjthe 
attempt  to  make  money  out  of  fluctuations  in  the  value 
of  property,  as  distinct  from  its  earnings. 

In  a  wider  -sense,  speculative  business  is  that  business 
which  involves  large  risks  for  the  chance  of  large  gains 

In  a  still  wider  sense,  speculative  management  is  the 
management  of  property  by  inside  rings  for  purposes 
distinct  from  the  permanent  interests  of  its  owners. 

To  the  first  of  these  forms  of  speculation,  corporate 
property  is  liable,  in  common  with  almost  all  other  prop¬ 
erty.  To  the  second  it  is  specially  liable,  because  large 
permanent  investments  involve  special  risks.  To  the 
third  it  is  still  more  specially  liable,  because  the  mass  of 
owners  have  no  direct  voice  in  its  management. 

Each  of  these  forms  of  speculation  always  goes  on' to  a 
certain  extent.  But  there  are  times  of  comparative  rest ; 
and,  on  the  other  hand,  times  when  speculation  develops 
an  unusual  and  abnormal  activity.  A  time  of  active  spec¬ 
ulation  is  almost  always  followed  by  a  more  or  less  severe 
reaction.  It  is  this  reaction  which  constitutes  a  commer¬ 
cial  crisis.1  This  alternation  between  unhealthy  activity 

1  There  is  a  decided  lack  of  literature  on  the  history  of  commercial  crises. 
The  best  book  is  Max  Wirth  :  “  Geschichte  der  Ilandelskrisen,”  Frankfort, 


I 


RAILROAD  OWNERSHIP  AND  SPECULATION  49 


and  depression,  this  ebb  and  flow  of  the  industrial  life,  con¬ 
stitutes  one  of  the  most  serious  problems  with  which  the 
political  economist  has  to  deal.  The  moral  evils  of  the 
period  of  speculation,  and  the  material  evils  of  the  crisis, 
are  alike  fraught  with  danger  to  the  community. 

Legislation  is  of  little  avail  against  these  evils.  The 
causes  which  produce  them  lie  beyond  the  sphere  of 
effective  state  interference.  Legislation  against  commer¬ 
cial  crises  is  about  as  effective  as  legislation  against  chills 
and  fever.  You  may  provide  good  sewage  by  public 
authority;  but  it  rests  with  the  individuals  whether  they 
will  bring  themselves  into  proper  connection  with  the 
system.  If  you  legislate  too  much,  you  may  so  weaken 
individual  responsibility  as  to  do  more  harm  than  good. 
Once  let  the  idea  go  forth  that  it  is  the  duty  of  the  state 
to  take  care  of  everybody,  and  everybody  will  cease  Jx> 
take  care  of  himself. 

There  is  another  difficulty  with  such  attempts  to  limit 
speculation  by  law — the  impossibility  of  separating  the 
bad  from  the  good.  Speculation  is  a  necessity  of  modern 
life.  Modern  business  involves  large  risks ;  some  one 
must  take  them.  The  important  thing  is  that  the  risks 
should  be  taken  by  men  with  judgment  to  foresee  the 
probable  effects,  and  property  to  stand  the  possible 
strains;  and  that  men  who  lack  the  judgment  and  the 
property  should  not  take  the  risks.* 1 

It  rests  with  individuals  to  learn  the  lessons  of  each 
crisis,  and  protect  themselves,  as  best  they  can,  from  a 

1874.  W.  M.  Grosvenor  :  “American  Securities,  etc.,  from  1872  to  1885” 
(issued  too  late  for  detailed  reference)  is  an  important  addition  to  our  authori¬ 
ties  on  this  matter.  See  also  article  “  Commercial  Crises,”  by  Horace  White, 
in  Lalor’s  Cyclopaedia,  vol.  i. 

1  See  article  “  Speculation,”  in  Lalor’s  Cyclopaedia,  vol.  iii. ,  and  the  refer¬ 
ences  there  given. 


5o 


RAILROAD  TRANSPORTATION. 


recurrence  of  the  same  evils.  The  crisis  of  i8^7  taught 
us  the  folly  of  business  based  on  speculative  banking. 
That  of  1873  taught  us  the  folly  of  land  speculation,  and 
of  stock  speculation  in  some  of  its  grosser  forms.  It  taught 
the  business  men  of  the  country  to  look  forward  to  the 
possibility  of  a  sudden  panic,  and  guard  against  its  effects. 

But  the  conditions  which  preceded  the  present  crisis 
were  radically  different  from  those  of  1873  or  1857.  There 
was  almost  no  speculative  banking.  There  was  a  notice¬ 
able  absence  of  land  speculation.  Most  remarkable  of  all, 
the  crisis  of  1884  has  thus  far  been  attended  by  no  general 
panic  of  the  first  rank,  though  we  stood  on  the  verge  of 
one  in  May  of  that  year.  There  has  been  no  crash  at 
any  one  point,  but  a  steady  sinking  all  along  the  line. 
Men  who  were  prepared  to  weather  a  sudden  storm,  how¬ 
ever  severe,  have  found  it  impossible  to  resist  this  steady 
downward  tendency,  month  after  month. 

All  these  things,  which  we  had  been  accustomed  to 
consider  necessary  precursors  of  a  crisis,  were  conspicuous 
by  their  absence.  The  cooditians  which  did  exist,  and 
which  seem  to  have  most  to  do  with  causing  the  present 
crisis,  were,  first,  an  unprecedently  rapid  expenditure  of 
capital  for  railroads  and  other  permanent  investments, 
and,  second,  a  system  of  business  methods  which  rendered 
it  easy  for  inside  rings  to  manipulate  the  market  for  their 
own  purposes.  It  is  important  to  analyze  the  workings 
of  these  causes,  especially  the  first. 

After  the  long  period  of  depression  following  the  crisis 
of  1873,  the  year  1879  witnessed  a  revival  of  confidence. 
The  volume  of  business  increased  decidedly ;  there  was  a 
general  advance  in  prices,  and  in  some  lines — iron  produc¬ 
tion,  for  instance — where  the  old  facilities  could  not  be  at 
once  increased  to  meet  the  new  demand,  an  extraordi- 


RAILROAD  OWNERSHIP  AND  SPECULATION 


51 


narily  rapid  advance.  Good  wheat  harvests  in  the  West, 
combined  with  an  active  European  demand,  caused  this 
expansion  of  business  to  continue  through  the  years  1880 
and  1881.  • 

Any  increase  of  price,  or  even  of  volume  of  business, 
means*  a  far  greater  proportionate  increase  of  net  earnings. 
If  the  price  of  $30  a  ton  on  pig-iron  gives  a  profit  of  $5,  a 
sudden  increase  to  $35  will  give  a  profit  of  about  $10.  An 
increase  of  17  per  cent,  in  the  price  would  thus  make  a 
difference  of  100  per  cent,  in  the  profit  on  the  transaction. 
If  new  capital  could  at  once  come  into  competition,  such 
profits  could  last  but  a  few  weeks.  But  it  takes  time  to 
build  a  successful  furnace,  factory,  or  railroad.  Those 
who  were  already  in  the  business  had,  for  the  time  being, 
a  partial  monopoly,  which  they  strengthened  by  pooling 
arrangements. 

The  years  of  expansion  were  years  of  large  return  to 
the  owners  of  the  old  investments.  A  large  part  of  this  in¬ 
creased  return  was  not  spent  on  luxuries,  but  re-invested. 
Another  large  mass  of  money  for  re-investment  was  set 
free  when  the  United  States  Government  called  in  its 
bonds.  These  two  causes  created  an  active  demand  for 
good  investments.  The  prices  of  all  good  securities  went 
up  so  high  that  it  was  impossible  to  obtain  satisfactory 
rates  of  interest.  In  the  desire  to  obtain  old  rates  of 
interest,  capital  sought  new  investments. 

A  new  permanent  investment  is  almost  necessarily 
speculative.  But  investors  did  not  look  at  the  matter  in 
that  light.  Men  who  would  not  have  thought  of  taking 
risks  to  secure  ten  per  cent,  instead  of  six  per  cent.,  took 
worse  risks  to  avoid  the  reduction  from  six  per  cent, 
to  five  per  cent.  If  an  investment  promised  but  six 
per  cent,  interest,  they  thought  it  prima  facie  sound. 


52 


RAILROA  D  TRANSPOR  TA  TION. 


If  it  was  in  the  form  of  a  first-mortgage  bond,  it  seemed 
prima  facie  secure.  Only  a  small  part  of  the  stock  specu¬ 
lation  was  of  the  first  form.  There  was  a  great  deal  of 
unconscious  stock  speculation  of  the  second  form  ;  and 
this  opened  the  way  for  the  third  and  worst  form  of  specu¬ 
lation,  which  was  practised  on  a  large  scale. 

In  the  three  years  1880-1882  we__bniJt  2q,oqo  miles  of 
railroads,  an  addition  of  thirty-four  per  cent,  to  the  rail¬ 
road  mileage  of  the  country.  Not  more  than  on£_Jdiird 
of  these  were  justified  by  existing  business.  Another 
third,  perhaps,  were  likely  to  be  profitable  at  some  future 
date,  or  at  any  rate  to  be  of  real  service  to  the  com¬ 
munity  ;  but  not  now.  Of .  the  remainder,  some  were 
built  to  increase  the  power  of  existing  systems,  where 
they  were  not  needed  and  not  likely  to  be  needed  on  their 
own  account.  Some  were  built  to  put  money  into  the  hands 
of  the  builders,  as  distinct  from  the  owners.  Some  were 
built  to jsell,  as  a  blackmailing  scheme  against  other  roads. 

To  make  money  out  of  the  building  of  a  railroad,  it  was 
only  necessary  to  subscribe  the  small  sum  requisite  for 
obtaining  a  charter,  with  the  right  to  issue  first-mortgage 
bonds.  The  original  subscribers  would  then  have  at 
their  disposal  whatever  funds  the  bondholders  might 
furnish.  They  could  pay  themselves  a  good  commission 
for  selling  the  bonds.  They  could  then  organize  as  a  con¬ 
struction  company,  and  contract  to  pay  themselves  a  high 
price  for  building  the  road.  These  are  but  two  means 
among  many  which  afforded  them  an  opportunity  of 
transferring  the  bondholder’s  money  to  their  own  pockets 
in  their  double  capacity  as  directors  and  contractors.1 

1  Hassler,  C.  W. :  “  Railroad  Rings,  and  Their  Relation  to  the  Railroad 
Question  in  this  Country.”  New  York,  1876. 

In  other  cases,  rather  less  frequent,  the  bona-fide  stockholders  were 


RAILROAD  OWNERSHIP  AND  SPECULATION.  S3 


This  was  not  the  worst.  When  the  money  came  out  of 
the  bondholders’  pockets,  the  bondholders  were  in  some 
sense  responsible  for  being  duped.  Sometimes  the  money 
came  out  of  the  pockets  of  the  stockholders  of  rival 
roads,  who  were  in  no  sense  responsible.  Some  roads 
were  built  because  they  could  so  injure  existing  roads  by 
competition  as  to  force  those  roads  to  _buy  them_x>ut. 
The  system  of  receiverships,  originally  intended  as  a  pro¬ 
tection  to  investors,  has  been  carried  to  a  point  where  it 
tends  to  the  furtherance  of  schemes  like  these.  Such 
was  the  character  and  purpose  of  many  of  the  recent 
railroad  projects.* 1 

The  rest  of  the  story  is  soon  told.  Insolvent  themselves, 
they  dragged  their  solvent  competitors  down  to  their  own 
level.  The  causes  which  in  i879~’8i  had  operated  to  pro¬ 
duce  an  advance,  soon  passed  away.  The  natural  decline, 
which  at  best  would  have  cut  down  the  profit  of  the 
permanent  investments,  found  some  of  them  loaded  with 
a  weight  of  new  debt,  and  many  of  them  struggling 
against  the  reckless  competition  of  insolvent  rivals.  This 
is  where  we  stand  to-day.  What  has  been  true  of  rail¬ 
roads  has  been  true  of  other  forms  of.  permanent  invest¬ 
ment.  First,  high  charges  and  high  profits.  Then 
speculative  investments  in  the  same  line.  Next,  an 
overstocked  market,  and  no-profit  at  all.  Finally,  cut- 
throat  competition  and  widespread  insolvency.2 3 

saddled  with  a  load  of  debt  and  other  fixed  charges  out  of  which  the  inside 
ring  could  make  its  profit. 

1  Compare  the  detailed  history  of  the  West  Shore  Road,  as  given  in 

Bradstreet' s,  April  25,  1885. 

3  The  Railway  Age  (Chicago)  publishes  at  the  beginning  of  each  year 
a  really  valuable  table  of  mileage  and  capital  of  railroads  sold  under  foreclos¬ 
ure  in  the  series  of  years  preceding.  In  the  years  1876—1880,  while  the  crisis 
of  1873  was  working  out  its  full  effect,  nearly  a  quarter  of  the  railroad  mileage 
of  the  country  was  thus  foreclosed  or  reorganized. 


54 


RAILROAD  TRANSPORTATION. 


To  the  community,  the  present  crisis  is  a  lesson  on  the 
folly  of  reckkss  investment.  Over-production,  of  which 
we  hear  so  much,  is  a  small  matter  compared  with  this. 
Mere  over-production  can  be  remedied  in  a  few  months. 
Over-investment  means  lasting  over-production  till  the  in¬ 
vestment  itself  is  worn  out,  or  till  the  business  of  the 
country  slowly  grows  up  to  a  higher  point.  Our  present 
crisis  is  directly  connected  with  ill-judged  over-investment. 
The  folly  of  investors  provoked  it ;  the  inclination  of 
managers  favored  it ;  the  knavery  of  rings  was  able  to 
make  a  profit  from  it. 

Under  the  stress  of  this  experience,  a  great  many  favor 
limitation  of  railroad  construction.1  Whether  this  can 
ever  be  effiectively  carried  out  is  more  than  questionable. 
That  it  would  be  desirable  in  many  cases,  there  can  be  no 
doubt.  But  it  is  not  easy  to  introduce  a  principle  so 
foreign  to  the  general  tendency  of  our  laws  ;  and  it  may 
be  questioned  whether  any  advantages  gained  at  one 
point  would  not  be  dearly  purchased  at  another.  The 
whole  matter  will  have  to  be  settled  on  practical  grounds ; 
and  it  is  not  easy  to  predict  which  way  the  balance  will 
incline.  Of  this  there  can  be  no  doubt :  that  it  is  desir¬ 
able  to  limit  the  facilities  for  constructing  railroads  with 
other  people’s  money.2  Yet  even  here  the  practical  en- 

1  Kirkman,  M.  M.  :  “  The  Relation  of  the  Railroads  in  the  U.  S.  to 
the  People  and  the  Commercial  and  Financial  Interests  of  the  Country." 
Chicago,  1885.  Also  an  able  review  of  this  pamphlet  in  The  Nation  (N.  Y.), 
xl.,  133. 

Compare  the  recommendations  of  N.  Y.  State  R.  R.  Commissioners  in 
each  of  their  reports  thus  far  issued. 

2  J.  B.  Hodgskin,  in  N.  Y.  Nation ,  xii.,  398,  on  “  The  Borrowing  Power 
of  Corporations." 

This  is  the  most  serious  evil  connected  with  the  system  of  stock-watering. 
Stock-wajeimg  has  threeJjorms  :  1 .  Where  new  stock  is  issued  to  represent 
money  which,  instead  of  being  paid  out  as  a  dividend,  is  used  in  improving 


RAILROAD  OWNERSHIP  AND  SPECULATION.  55 


forcement  of  any  law  is  ipore  difficult  than  would  at  first 
sight  appear. 

To  individuals,  whatever  else  the  present  crisis  may 
teach,  it  teaches  :  I.  That  the  evils  of  speculation  are  not 
avoided  by  avoiding  its  first  and  most  obvious  forms.  2. 

the  property.  2.  Where  new  stock  is  issued  to  represent  an  actual  increase 
in  the  earning  capacity  and  market  value  of  the  property,  so  that  the  par 
value  shall  represent  as  nearly  as  possible  the  real  value.  3.  Where  stock  is 
issued  to  give  certain  parties  control  of  the  road  without  actually  risking  any 
thing  like  the  amount  of  money  represented  by  the  par  value  of  their  shares. 

The  second  is  on  the  whole  the  commonest  form.  It  is  resorted  to  for  two 
reasons  :  either  to  equalize  the  share  of  the  stockholders  of  different  roads  in 
a  consolidation,  or  else  to  furnish  an  excuse  for  paying  higher  dividends  than 
the  law  or  public  sentiment  would  otherwise  allow.  Any  such  evasion  of  the 
law  is  a  bad  thing  in  many  ways.  But  the  immediate  effect  is  not  as  bad  as  is 
commonly  supposed  ;  for,  as  we  shall  see  in  a  subsequent  chapter,  the  attempt 
to  keep  rates  down  by  limiting  dividends  defeats  its  own  purposes  ;  and  the 
fact  that  such  a  limitation  of  dividends  is  evaded,  therefore  makes  very  little 
difference  to  the  shipper. 

The  third  form  of  stock-watering,  for  purely  speculative  purposes,  is  by 
far  the  worst — in  fact  it  is  one  of  the  worst  evils  of  its  kind  under  which  the 
country  suffers.  And  it  is  a  great  misfortune  that  it  is  not  more  clearly  dis¬ 
tinguished  in  the  public  mind  from  the  first  and  second  forms.  The  real 
evils  of  the  third  form  are  allowed  to  go  on  unchecked,  because  they  are  not 
treated  separately  from  the  much  less  real  evils  of  the  first  and  second  forms. 
The  unsuccessful  attempt  to  prohibit  them  all  prevents  any  successful  attempt 
to  prohibit  the  worst  of  them. 

For  a  somewhat  different  view,  see  Simon  Sterne,  in  Lalor’s  Cyclopaedia, 
Art.  “  Railways,”  pp.  527,  528. 

See  also  Report  of  Special  Com.  on  R.  R.  Transportation  of  the  N.  Y. 
Chamber  of  Commerce,  on  “  Watering  the  Stocks  of  Corporations,”  Nov.  1, 
1883.  The  position  taken  in  this  report  seems  quite  different  from  the  one 
just  advocated  ;  but,  in  reality,  it  comes  to  nearly  the  same  thing.  The 
committee,  it  is  true,  would  prohibit  all  three  forms  7  but  they  would,  at  the 
same  time  so  modify  the  law  or  feeling,  with  reference  to  high  rates  of 
dividend,  as  to  take  away  nearly  all  inducement  for  stock-watering  of  the 
first  or  second  forms.  This  is  the  effect  and  intention  of  proposition  6,  on  p.  5 
of  the  report.  This  would  bring  the  law  sharply  to  bear  against  the  third  and 
worst  form. 


56 


RAILROAD  TRANSPORTATION’. 


That  when  large  quantities  of  capital  are  seeking  invest¬ 
ment,  it  may  be  as  unsafe  to  try  to  avoid  a  reduction  of 
rates  of  interest  as  it  is  at  other  times  to  take  risks  to 
secure  an  advance.  3.  That  investors  are  under  obliga¬ 
tions  to  themselves  and  to  the  community  to  make  sure 
that  their  property  is  not  managed  for  other  interests 
than  their  own.  The  interests  of  the  investor  are  the 
permanent  interests  of  the  property ;  those  of  the  director 
are  often  temporary,  and  sometimes  purely  personal  ones. 
The  two  may  readily  conflict.  If  the  permanent  interests 
are  sacrificed,  it  must  result  in  ruin  to  the  investors,  and 
may  result  in  commercial  distress  for  the  whole  com¬ 
munity.1 

It  is  in  this  connection  that  the  study  of  railroad  ac¬ 
counts  assumes  its  public  importance.2  The  fact  that  so 
few  among  the  many  owners  of  a  railroad  have  any  direct 
share  in  its  management,  makes  it  all  the  more  important 
that  its  published  accounts  should  present  a  true  view  of 
its  financial  condition.  They  are  too  often  arranged  to 
conceal  the  truth  instead  of  presenting  it. 

The  general  principles  involved  in  the  published  accounts 
of  a  railroad  are  simple.  Their  practical  application  is 
difficult  in  the  extreme.  We  can  do  no  more  than  show 
what  these  principles  are,  and  where  the  chief  difficulties 
and  dangers  lie. 

A  railroad  has  two  ways  of  getting  money  ;  it  may  earn 
it,  or  borrow  it.  It  has  three  ways  of  getting  rid  of  money  ; 
it  may  spend  it,  invest  it,  or  divide  it.  These  things  will 
generally  nearly  balance  one  another  ;  any  difference  will 

1  Herbert  Spencer  :  “  Railway  Morals  and  Railway  Policy,”  Edinburgh 
Review ,  Oct.,  1854. 

2  Massachusetts  R.  R.  Commissioners’  Reports,  1S74-1S78.  Kirkman  : 
“  Railway  Expenditures  :  Their  Extent,  Object,  and  Economy,”  Chicago, 
1880,  vol.  ii.,  pp.  1-136. 


RAILROAD  OWNERSHIP  AND  SPECULATION .  57 


be  represented  by  variations  in  the  amount  of  cash  assets 
on  hand  from  time  to  time.  The  whole  is  summarized  in 
the  treasurer’s  balance  sheet  for  the  year,  which  includes 
all  the  financial  transactions,  of  any  sort  whatever,  during 
the  time  in  question.  The  form,  much  condensed,  is  as 
follows : 

A.  B.,  Treas’r,  in  acct  with  the  M.  and  N.  R.  R. 

Dr.  Cr. 

Cash  assets,  January  i,  Expenses2 . 

1884 . $  50,000  Permanent  investment3 

Gross  earnings  .  .  .  1,000,000  Dividends . 

Increase  of  debt  1  .  .  65,000  Cash  assets,  Dec.  31, 

1884 . 


$750,000 

70,000 

240,000 

55,ooo 


$1,115,000 


$1,115,000 


This  is  the  fundamental  account  of  which  the  others  are 
but  parts.  Comparatively  few  railroads  publish  their  treas¬ 
urer’s  balance  sheet ;  but  with  the  aid  of  two  successive  re¬ 
ports  of  a  railroad,  a  man  moderately  familiar  with  these 
matters  can  deduce  the  treasurer’s  balance  sheet  for  the  in¬ 
tervening  time. 

From  merely  looking  at  this  account  it  is  clear  that  if  the 
item,  “  Increase  of  debt,”  had  been  made  $75,000  instead 
of  $65,000,  the  amount  of  dividends  might  have  been 
$250,000  instead  of  $240,000,  without  either  changingany 
of  the  other  items,  or  destroying  the  balance  of  the  whole 
account.  In  other  words,  the  amount  apparently  available 
for  dividends  varies  with  the  amount  of  increase  of  debt ; 
and  this  last  matter  is  largely  under  the  control  of  the 
directors.  Here  is  where  most  of  the  abuses  of  railroad 
accounting  arise. 


1  Either  in  the  form  of  bonded  debts,  notes  payable,  or  simply  bills  and  ac¬ 
counts  payable.  Every  thing  not  in  the  form  of  bonds  is  included  under  the 
title  of  floating  debt. 

2  Operating  expenses,  interest,  rentals,  and  taxes. 

3  New  construction,  equipment,  etc.,  as  distinct  from  mere  repairs. 


58 


RA ILROAD  TRANSPOR  TA  TION. 


The  matter  comes  up  in  this  general  form.  As  the  facts 
are  presented  to  the  directors,  it  is  found  that  the  gross 
earnings  of  the  road  for  the  year  have  been  $1,000,000. 
The  total  expenditures  of  every  kind  have  amounted  to 
$820,000,  of  which  (say)  $700,000  have  been  paid,  leaving 
$120,000  unpaid.  The  treasury  then  has  on  hand  $300,- 
000  (besides  an  amount  of  unused  cash  assets,  materials, 
etc.,  of  $50,000,  which  must  be  kept  at  about  that 
figure).  If  they  pay  up  all  their  bills,  they  have  $180,000 
to  divide.  If  they  pay  none  of  them  they  have  $300,000. 
The  question  is,  how  much  shall  they  pay  ? 

The  first  impulse  of  most  men  is  to  say,  let  them  pay 
their  bills  first,  and  then  divide  what  is  left.  A  closer  ex¬ 
amination  shows  a  great  many  cases  in  which  this  principle 
cannot  be  applied.  Suppose  a  railroad  builds  a  branch  line 
to  secure  new  traffic.  To  attempt  to  pay  for  this  out  of 
current  earnings  would  perhaps  be  impossible.  To  try  to 
pay  any  considerable  part  in  this  way,  would  be  to  keep 
money  out  of  the  investor’s  pocket  which  had  been  really 
earned,  and  apply  it  to  an  extension  of  the  business.  A 
private  individual  may  do  this.  He  can  readily  invest  his 
capital  in  extension  of  his  own  business.  But  a  railroad 
manager  cannot  do  this.  He  is  dealing  with  the  property 
of  a  large  number  of  independent  investors  who  want  ac¬ 
tually  to  receive  whatever  is  really  earned,  and  not  be 
forced  to  re-invest  it,  whether  they  will  or  no.  If  a  rail¬ 
road  man  wishes  to  build  branches,  or  to  double  his  track, 
or  to  make  large  additions  to  his  equipment — all  of  which 
increases  the  permanent  investment,  and  probable  earning 
capacity  of  the  road, — he  feels  justified  in  borrowing 
money  to  pay  for  it.  In  the  case  in  question,  of  the 
$120,000  spent  and  unpaid,  the  theory  would  be  to  pay  all 
that  was  due  to  current  expenses,  or  perhaps  a  little  more, 


RAILROAD  OWNERSHIP  AND  SPECULATION.  $9 


and  borrow  whatever  was  used  for  permanent  investment, 
or  perhaps  a  little  less.  The  amount  of  earnings  remaining 
in  hand,  after  the  current  expenses  have  been  paid,  is  the 
sum  available  for  dividends. 

They  then  separate  the  account  into  two  parts :  one,  the 
“  income  account,”  giving  the  current  receipts  and  ex¬ 
penses ;  the  other,  to  be  incorporated  in  the  “general 
balance  sheet  ”  of  assets  and  liabilities  of  a  more  perma¬ 
nent  nature. 

The  income  account  will  then  read  thus : 


Gross  earnings  .  .  .  $1,000,000  Expenses.  ....  $750,000 

Dividends  ....  240,000 

Surplus  for  year  .  .  10,000 


$1,000,000  $1,000,000 


The  rest  of  the  account  is  added  to  the  general  balance 
sheet  of  the  previous  year,  thus  : 


General  Balance  Sheet ,  Jan.  1,  1884. 


Liabilities. 

Stock . $4,000,000 

Bonds . 2,000,000 

Floating  debt  .  .  .  200,000 

Surplus .  100,000 


Assets 

Construction 
Equipment  . 
Investments  1 
Cash  assets  .  . 


$5,000,000 

700,000 

550,000 

50,000 


$6,300,000 


$6,300,000 


To  which  must  now  be  added  from  the  year’s  account, 
every  thing  not  included  in  the  current  earnings  and  ex¬ 
penditures,  thus : 

Cash  assets,  Jan.  1,  1884  $50,000  New  construction  .  .  $70,000 
Increase  of  debt  .  .  .  65,000  Cash  assets,  Jan.  1,  1885  55, 000 
Surplus  for  year p  .  .  10,000  _ 


$125,000 


$125,000 


1  Real  estate,  stock  of  other  corporations,  etc. 

*  Whatever  a  road  earns,  and  does  not  spend  or  divide,  constitutes  the 
surplus  for  the  year.  In  the  income  account  it  appears  on  one  side,  to  make 


6o 


RAILROAD  TRANSPORTATION. 


The  first  item  in  this  account  cancels  the  last  item  of 
the  general  balance  at  the  beginning  of  the  year,  and  we 
then  have  by  simple  addition 

General  Balance  Sheet ,  Jan.  I,  1885 *  1 : 


Stock . $4,000,000  Construction  .  .  .  $5,070,000 

Bonds . 2,000,000  Equipment  ....  700,000 

Floating  debt  .  .  .  265,000  Investments  ....  550,000 

Surplus .  110,000  Cash  assets  ....  5 5, 000 


$6,375,000  $6,375,000 

The  theory  is  simple  enough.  But  there  is  an  enor¬ 
mous  practical  difficulty  in  knowing  what  are  current  ex¬ 
penses  and  what  are  permanent  investments. 

A  railroad  has  a  wooden  bridge  which  needs  repair. 
Instead  of  repairing  it  the  company  substitutes  an  iron 
bridge  whose  first  cost  is  much  greater.  How  much  of 
the  cost  shall  be  charged  to  repairs  and  how  much  to  new 
construction?  Or,  to  take  a  problem  which  was  con¬ 
stantly  coming  up  a  few  years  ago  :  A  road  takes  up 
iron  rails  which  cost  it  $50  per  ton,  substitutes  steel  rails 
at  $60  per  ton,  and  sells  the  old  iron  at  $30.  How  shall 
the  debits  and  credits  be  divided  between  the  repairs  and 
construction  account  ?  These  are  far  from  being  excep¬ 
tionally  difficult  cases  to  deal  with. 

Even  with  the  best  of  intentions  on  the  part  of  railroad 
managers,  these  things  are  hard  to  decide.  When  the 

the  payments  balance  the  receipts.  In  that  part  of  the  account  which  is  car¬ 
ried  over  to  the  general  balance  sheet,  it  must  appear  on  the  other  side,  to 
make  the  liabilities  balance  the  assets.  Sometimes  there  is  a  deficit  instead 
of  a  surplus.  Then  the  whole  matter  is  reversed. 

1  The  general  balance  sheet  at  any  given  time  is  really  nothing  more  nor 
less  than  a  sum  of  the  permanent  part  of  all  previous  balance  sheets  ;  the 
successive  permanent  investments  on  one  side,  the  means  by  which  they 
were  paid  for  on  the  other. 


RAILROAD  OWNERSHIP  AND  SPECULATION.  6 1 


intentions  are  not  the  best,  it  is  easy  to  decide  them 
wrongly,  and  hard  to  detect  the  wrong.  It  will  quite 
frequently  happen  that  the  management  is  far  more  inter¬ 
ested  in  having  a  road  declare  large  dividends  than  in 
having  its  capital  account  on  a  sound  basis.  To  declare 
a  dividend  which  they  have  not  earned,  they  must  find  a 
pretext  for  borrowing  money.  This  they  usually  do  by 
swelling  the  item  of  new  construction  unfairly.  If  they 
charge  to  new  construction  what  really  belongs  to  repairs, 
they  can  borrow  money  to  pay  for  what  should  really 
have  been  paid  out  of  earnings,  and  apply  the  money, 
thus  unfairly  saved,  to  swell  the  sum  available  for  divi¬ 
dends.  This  is  one  among  many  ways ;  but  it  is  more 
common  than  all  the  rest  put  together.1 

We  have  thus  far  treated  the  question  from  the  inside 
point  of  view  :  The  facts  being  given,  what  dividends 
should  be  or  can  be  paid  ?  To  the  general  public 
the  matter  appears  in  a  somewhat  different  light.  A 
dividend  having  been  paid,  how  can  an  outsider  deter¬ 
mine  from  the  accounts  whether  it  has  presumably  been 
earned  ?  It  is  impossible  to  give  a  really  satisfactory 
answer  to  this  question.  We  can  only  call  attention  to 
a  few  of  the  more  decisive  indications. 

We  have  seen  that  the  common  way  of  swelling  divi¬ 
dends  is  to  charge  repairs  to  new  construction,  and  borrow 
money  to  pay  for  it.  If  then  we  find  that  the  sum  for 
repairs  is  small,  and  for  new  construction  large,  and  that 
there  is  a  constant  increase  of  the  floating  debt,  there  is  a 
strong  presumption  against  the  management,  and  against 
the  honesty  of  the  dividend.  It  requires  some  technical 
knowledge  to  decide  whether  the  amounts  charged  to 

1  Another  way  of  doing  the  same  thing,  is  to  charge  high  prices  for  haul¬ 
ing  the  materials  which  a  road  uses  in  its  own  construction.  The  earnings 
are  thus  swelled  at  the  expense  of  the  construction  account. 


62 


RAILROAD  TRANSPORTATION. 


repairs  and  construction  respectively  are  really  large  or 
small.  They  have  to  be  compared  both  with  the  statis¬ 
tics  of  what  has  been  actually  done,  and  with  previous 
annual  reports  of  the  same  company.  From  one  such 
report  we  can  learn  but  little.  If  in  a  series  of  years  we 
find  the  repairs  diminishing,  and  the  new  construction 
increasing,  without  any  marked  change  in  the  general 
condition  of  the  road,  we  may  be  reasonably  sure  that 
something  is  wrong. 

It  is  rather  easier  to  draw  these  inferences  now  than  it 
was  a  few  years  ago.  One  of  the  best  pieces  of  work 
done  by  the  Massachusetts  Commission  was  on  this  mat¬ 
ter  of  railroad  accounts.  In  consultation  with  the  officers 
of  the  companies,  they  attempted,  some  ten  years  ago,  to 
secure  a  certain  uniformity  in  railroad  returns,  and  were 
so  far  successful  that  their  example  was  followed  in  other 
States.  In  the  years  1878-9  there  was  an  effort  made  by  a 
number  of  different  State  commissions  to  secure  com¬ 
mon  forms  of  return  throughout  the  country;  and  in  this 
they  were  reasonably  successful. 

No  system  of  accounting,  however  perfect,  will  secure 
the  public  against  false  original  entries;  nor  will  any 
amount  of  technical  knowledge  avail  to  detect  certain 
forms  of  rascality.  If  a  man  says  he  has  spent  money  for 
coal,  when  really  he  has  put  part  of  it  into  his  own  pocket 
in  the  form  of  a  commission,  nothing  short  of  personal 
comparison  between  the  vouchers  and  the  quantity  de¬ 
livered  can  do  more  than  raise  an  unproved  suspicion. 
But  if  the  evil  lies  not  in  the  original  entries,  but  in  the 
deceptive  manipulation  of  those  entries,  the  requirement 
of  a  good  system  of  returns  will  do  much  to  check  it,  and 
the  intelligent  study  of  those  returns  will  do  a  great  deal 
more. 


CHAPTER  IV. 


COMPETITION  AND  COMBINATION  IN  THEORY.1 

Different  forms  of  monopoly — Recent  growth  of  industrial  monopolies — The 
law  of  competition  as  commonly  stated — Cases  where  it  fails  to  operate 
— Difference  between  mercantile  competition  and  the  competition  of 
factories  or  railroads — Forms  of  combination — Pools — Labor  combina¬ 
tions — The  legal  view  of  these  matters,  and  its  results. 

H.  Sidgwick :  “  Principles  of  Political  Economy,”  London,  18S3  ; 

book  ii. ,  chap.  x.  :  “Of  Monopoly  and  Combination.” 

T.  H.  Farrer  :  “The  State  in  its  Relation  to  Trade,”  London,  1883, 
chap.  x.  This  chapter  is  condensed  from  an  article  by  the  same  author  in 
the  Quarterly  Review ,  October,  1870,  entitled  “  Industrial  Monopolies.” 

H.  D.  Lloyd:  “Lords  of  Industry,”  North  Americati  Review ,  June, 
1884. 

Fr.  Kleinwachter :  “Die  Kartelle  :  ein  Beitrag  zur  Frage  der  Organiza¬ 
tion  der  Volkswirthschaft.”  Innsbruck,  1883. 

For  authorities  dealing  specially  with  the  subject  of  railroad  combination, 
see  next  chapter. 

Competition  is  the  effort  of  rival  sellers  to  secure  a 
market  for  their  goods,  each  striving  to  offer  better  terms 
than  his  competitors.  Competition  is  what  prevents  any 
individual  from  fixing  prices  to  suit  himself,  because  his 
rivals  will  give  lower  prices,  and  he  will  get  no  business 
at  all. 

The  opposite  of  competition  is  monopoly.  Where  com¬ 
petition  does  not  act  at  all,  there  is  complete  monopoly ; 
where  it  acts  imperfectly,  there  is  partial  monopoly. 

1  Part  of  this  chapter  appeared  in  the  Andover  Review ,  Nov.,  1884  ;  part 
in  the  Independent ,  Jan.  29,  1885 — one  of  a  series  of  articles  -which  have 
furnished  material  for  chapters  iii. ,  vi.,  vii.,  and  xiii. 

63 


64 


4 


RAILROAD  TRANSPORTATION . 


A  monopoly  may  be  either  legal,  natural,  or  industrial. 

A  legal  monopoly  is  where  competition  is  prohibited 
by  law.  The  trade  guilds  of  the  middle  ages  were  com¬ 
plete  legal  monopolies,  because  no  one  outside  of  the 
guild  was  allowed  to  engage  in  the  trade.  The  postal 
service  is  a  monopoly  of  the  United  States  Government, 
because  no  private  individual  or  corporation  is  allowed  to 
compete  in  the  business  of  letter-carrying.  Protected  in¬ 
dustries  are  partial  monopolies,  because  no  foreign  pro¬ 
ducer  is  allowed  to  compete  with  the  home  producer  on 
equal  terms.1 

A  natural  monopoly  is  where  competition  is  physically 
impossible.  The  water  supply  of  large  cities  is  often  a 
tolerably  complete  natural  monopoly,  because  the  avail¬ 
able  sources  of  supply  are  so  few  that  they  will  often  be 
in  the  hands  of  a  single  company.  It  is  the  same  way 
with  canals  and  with  docks,  with  mines,  and  even  with 
lands.  The  land  which  is  best  available  for  any  particular 
purpose  is  so  small  that  the  owners  of  other  land  can 
compete  but  imperfectly  with  the  owners  of  the  most 
favored  spots,  who  can  therefore  exact  a  return  for  their 
monopoly  privileges  in  the  form  of  ground  rent.2  Rent  is 
the  price  paid  for  the  use  of  a  natural  monopoly. 

An  industrial  monopoly  is  where  the  business  interests 

1  With  these  exceptions  there  are  no  legal  monopolies  in  the  United  States 
(unless  patents  or  copyrights  be  thought  to  have  that  character).  In  times 
past,  such  monopolies  were  frequent.  Steamboat  navigation  in  the  State  of 
New  York  was  for  many  years  a  legal  monopoly.  Efforts  were  made  by 
certain  railways  in  Massachusetts  to  obtain  monopoly  rights — not  entirely 
without  success  (Adams,  p.  56).  Compare  the  history  of  the  Camden  and 
Amboy  Transportation  Co.  in  New  Jersey. 

On  the  continent  of  Europe  legal  monopolies  are  by  no  means  uncommon 
at  the  present  day. 

2  A  large  part  of  the  monopoly  of  existing  railroads  consists  in  the  posses^ 
sion  of  city  real  estate  which  gives  them  superior  terminal  facilities. 


COMPETITION  AND  COMBINATION .  65 

of  the  parties  concerned  make  competition  practically  im¬ 
possible,  even  when  there  is  neither  law  nor  natural  obsta¬ 
cle  to  hinder  it.  And  the  present  age  is  an  age  of  industrial 
monopoly,  however  we  may  try  to  shut  our  eyes  to  the  fact. 
We  have  not  free  competiton,  nor  can  we  fairly  expect 
to  have  it  in  the  future.  Instead  of  moving  toward  it, 
we  are  moving  away  from  it.  This  is  a  fact  to  which 
people  are  just  beginning  to  open  their  eyes.  They 
begin  to  see  that  in  a  great  many  cases  prices  are  deter¬ 
mined,  not  by  competition,  but  by  combination.  They 
do  not  yet  see  the  real  extent  to  which  this  tendency 
prevails.  Still  less  do  they  understand  the  reasons  why 
it  must  prevail,  now  and  in  the  immediate  future. 

We  are  generally  supposed  to  live  in  an  age  of  free 
competition.  The  legal  restraints  upon  business  which 
two  centuries  ago  were  the  rule  have  now  become  the  ex¬ 
ception.  They  are  only  in  force  on  the  national  frontiers, 
in  the  form  of  a  protective  tariff  against  the  foreigner. 
Within  these  frontiers  a  man  is  allowed  to  use  his  own 
judgment  as  to  the  best  chance  of  making  a  living  ;  he 
is  neither  restricted  in  his  choice,  nor  supported  if  he 
makes  a  mistake.  He  must  look  out  for  his  own  market. 
None  will  be  compelled  by  law  to  have  their  flour  ground 
at  his  mill,  or  their  clothes  made  at  his  shop. 

Physical  as  well  as  legal  hindrances  to  competition  are 
passing  away.  The  invention  of  railroads  has  made 
transportation  ten  times  quicker  and  ten  times  cheaper. 
Two  generations  ago,  the  expense  of  cartage  was  such 
that  wheat  had  to  be  consumed  within  two  hundred 
miles  of  where  it  was  grown.  To-day,  the  wheat  of 
Dakota,  the  wheat  of  Russia,  and  the  wheat  of  India 
come  into  direct  competition.  The  supply  at  Odessa  is 
an  element  in  determining  the  price  at  Chicago.  Two 


66 


RAILROAD  TRANSPORTATION. 


generations  ago,  the  market-gardeners  of  the  suburbs  had 
a  monopoly  of  the  supply  of  fresh  fruit  and  vegetables  for 
the  city ;  now,  fast  trains  bring  the  whole  country  for  hun¬ 
dreds  of  miles  into  competition  with  them.  Western  beef 
now  competes  with  Eastern  beef  even  in  the  country  towns 
of  New  England.  Cabbages  from  Germany  contend  with 
cabbages  from  Missouri  in  the  markets  of  New  York. 
The  local  tradesman  is  no  longer  sure  of  the  local  trade. 
Mercantile  houses  in  the  city,  doing  business  by  agent  or 
by  correspondence,  try  to  undersell  the  jobbers  of  smaller 
towns,  or  even  to  take  away  business  from  the  country 
stores.  Factories,  which  twenty  years  ago  were  not 
within  arm’s  reach  of  one  another,  can  now  get  railroad 
rates  low  enough  to  enable  them  to  carry  a  fierce  com¬ 
petitive  war  over  the  whole  district  which  they  supply. 

The  old  monopolies  are  dead,  the  old  barriers  to  trade 
are  disappearing.  But  the  same  movement  which  has  done 
away  with  legal  monopolies,  and  has  gone  so  far  toward 
abolishing  many  natural  ones,  has  created  a  system  of  in¬ 
dustrial  monopolies  even  more  widespread  and  formidable. 
We  are  seeing  how  this  tendency  acts  in  the  case  of  rail¬ 
roads  in  the  United  States.  It  has  been  no  less  marked 
in  Europe.  George  Stephenson  foresaw  the  future  of 
railroad  combination  from  the  first.  “  Where  combina¬ 
tion  is  possible,”  he  said,  “  competition  is  impossible.”  A 
few  English  statesmen  agreed  with  him.  The  majority 
were  either  too  blind  to  see,  or  too  weak  to  act.  It  was 
only  by  the  hardest  experience  that  they  learned  the 
lesson  ;  but  once  learned,  it  was  learned  thoroughly.1  On 
the  continent  of  Europe,  railroad  combination  prevailed 
yet  more  completely.  On  either  side  of  the  Atlantic, 
most  persons  who  have  really  looked  into  the  subject  have 


1  See  chap.  ix. 


COMPETITION  AND  COMBINATION 


67 


come  to  regard  railroads  as  a  sort  of  natural  monopoly, 
not  regulated  by  the  ordinary  laws  of  trade,  and  needing 
to  be  closely  watched  by  public  authority. 

But  we  are  now  beginning  to  find  combination  in  a  mul¬ 
titude  of  other  cases  where,  until  now,  we  have  supposed 
ourselves  to  enjoy  the  benefits  of  free  competition.  The 
story  of  the  Standard  Oil  Company1  opened  the  eyes  of  a 
great  many  people.  Some  twenty  years  ago  two  or  three 
men,  of  small  capital  but  great  business  ability,  got  hold 
of  a  new  process  for  refining  petroleum.  Their  ability  and 
their  process  gave  them  an  advantage  over  their  competi¬ 
tors,  who  found  the  competition  ruinous,  and  one  after 
another  were  led  either  to  make  terms  with  them  or  with¬ 
draw  from  the  field.  The  result  was  an  organized  associa¬ 
tion,  with  a  capital  which  ultimately  reached  eighty  million 
dollars,  including  nearly  all  the  refineries  in  the  country. 
The  association  settled  just  what  prices  should  be  charged 
in  each  district,  and  there  was  no  man  who  had  a  chance 
of  competing  with  them  independently.  For  the  company, 
besides  the  power  obtained  by  controlling  an  enormous 
capital,  had  come  into  such  relations  with  the  railroads  and 
the  pipe-lines  that  no  independent  refiner  had  any  chance 
whatever.  These  contracts,  more  discreditable  to  the  rail¬ 
roads  than  to  the  Standard  Oil  Company,  were  what 
attracted  public  attention  to  its  doings.  In  other  respects 
its  work  seems  to  have  been  good.  The  quality  of  oil  has 
been  improving,  the  price  has  been  declining  rapidly  ;  it 
could  hardly  have  declined  faster  under  free  competition. 
But  the  public  are  alarmed  at  the  growth  of  such  a  power 
in  their  midst, — able,  apparently,  to  dictate  the  price  of  a 

1  Among  the  numerous  articles  on  this  subject  may  be  mentioned  those 
of  Messrs.  Camden  and  Welch  {pro  and  con )  in  the  North  A  merican  Review, 
vol.  136,  pp.  181-200. 


68 


RAILROAD  TRANSPORTATION. 


necessary  of  life,  and  subject  to  no  restraint  or  control 
from  outside.  Statesmen,  lawyers,  and  journalists  held  up 
their  hands  in  holy  horror,  and  exclaimed  :  “  Can  such 
things  be  ?  ” 

But  the  more  they  looked,  the  more  they  were  forced  to 
the  conclusion  that  such  things  could  be  and  had  been, 
and  are  still  increasing.  Nearly  every  industry  employing 
fixed  capital  on  a  large  scale  has  its  pool,  whether  they  call 
it  by  that  name  or  not.1  The  Anthracite  Coal  Combina¬ 
tion  has  been  less  successful  than  the  Standard  Oil  Com¬ 
pany  ;  but  its  method  of  crushing  small  rivals  by  denying 
them  transportation  facilities  has  made  it  almost  equally 
notorious.2  And  now  the  system  of  combinations  has 
extended  to  other  coal  regions  besides  the  anthracite. 
Again,  every  branch  of  hardware,  from  rails  to  carpet  tacks, 
has  its  combination  to  keep  up  prices  or  restrict  production. 
The  cases  are  only  too  frequent  where  the  combination 
pays  certain  mills  for  ?iot  running  more  than  they  could 
earn  by  running.  For  lumber  and  for  paper,  for  cattle  and 
for  milk,  for  cartridges  and  for  matches, — in  each  business 
there  is  an  organized  combination,  fixing  rates  and  often 
limiting  production.3  The  waterways  themselves,  which, 
we  are  so  often  assured,  are  to  protect  us  from  the  mon¬ 
opoly  of  the  railroads,  have  their  rates  fixed  and  their 
traffic  pooled  by  combinations  of  greater  or  less  influence, 
— from  the  local  barge  association  of  some  interior  town  to 
the  great  North  Atlantic  Steam  Conference.  How  much 
freight  each  of  the  leading  steamships  is  to  carry  is  not 

1  This  is  not  confined  to  America.  See  Kleinwachter,  pp.  137-8,  and 
elsewhere  ;  Georges  Salomon  “  Les  Coalitions  Commerciales  d’Aujourd’ hui.” 
Paris,  1885. 

2  For  a  brief  statement  of  its  purposes,  see  Report  on  the  Internal  Com¬ 
merce  of  the  United  States,  1879,  pp.  179-182. 

8  Lloyd,  “  Lords  of  Industry,”  p.  549. 


t 

COMPETITION  AND  COMBINATION.  69 

infrequently  made  the  subject  of  agreement  with  the 
owners  of  rival  vessels.1 

What  is  to  be  done  in  the  face  of  a  system  like  this  ? 
Our  first  impulse  is  to  say  that  its  growth  must  be  stopped 
at  all  hazards.  We  are  inclined  to  sympathize  with  the 
anti-monopolists  in  demanding  that  the  laws  which  have 
fostered  abuses  of  this  kind  should  be  abolished  or  re¬ 
formed.  But  have  the  laws  actually  fostered  these 
abuses  ?  It  is  hard  to  make  out  that  they  have,  except 
in  the  most  indirect  manner  ;  in  its  direct  action  the  law 
hinders  and  thwarts  them.  Contracts  for  the  restriction 
of  trade  are  illegal,  and  the  State  will  not  enforce  them  ; 
railroads  feel  this  at  every  turn.  The  pools  of  to-day  are 
not  like  the  monopolies  of  past  centuries,  or  the  guilds  of 
the  middle  ages,  creatures  and  pets  of  the  law  ;  they 
arise  from  very  different  causes,  and  grow  strong  in  the 
face  of  adverse  legislation. 

All  our  education  and  habit  of  mind  make  us  believe 
in  competition.  We  have  been  taught  to  regard  it  as  a 
natural  if  not  necessary  condition  of  all  healthful  business 
life.  We  look  with  satisfaction  on  whatever  favors  it, 
and  with  distrust  on  whatever  hinders  it.  We  accept 
almost  without  reserve  the  theory  of  Ricardo,  that,  under 
open  competition  in  a  free  market,  the  value  of  different 
goods  will  tend  to  be  proportional  to  their  cost  of  pro¬ 
duction.  According  to  this  idea,  if  the  supply  of  a  par¬ 
ticular  kind  of  goods  is  short,  and  the  price  therefore  so 
high  as  to  be  greatly  in  excess  of  the  cost  of  production, 
outside  capital  will  be  attracted  into  the  business  until 
the  supply  is  sufficiently  increased  to  meet  the  wants  of 
the  market.  But  as  soon  as  this  point  is  passed,  and  the 

1  See  Blue  Book  of  Select  Committee  on  Railway  Rates,  etc.  Evidence, 
1881,  qu.  14,309-14,330. 


70 


RAILROAD  TRANSPORTATION. 


price  begins  to  fall  below  cost  of  production,  people  will 
refuse  to  produce  at  a  disadvantage,  the  supply  will  be 
lessened,  and  the  price  rise  to  its  normal  figure.  If  all 
this  be  true,  competition  indeed  furnishes  a  natural  regu¬ 
lator  of  prices,  with  which  it  is  wicked  to  interfere. 

It  was  approximately  true  when  Ricardo  wrote  ;  but, 
in  the  business  of  to-day,  one  point  in  the  chain  of  rea¬ 
soning  fails,  and  the  whole  breaks  down  with  it.1  It  is 
not  true  that  when  the  price  falls  below  cost  of  production 
people  always  find  it  for  their  interest  to  refuse  to  produce 
at  a  disadvantage.  It  very  often  involves  worse  loss  to 
stop  producing  than  to  produce  below  cost. 

Let  us  take  an  instance  from  railroad  business, — here 
made  artificially  simple  for  the  sake  of  clearness,  but  in 
its  complicated  forms  occurring  every  day.  A  railroad 
connects  two  places  not  far  apart,  and  carries  from  one  to 
the  other  (say)  100,000  tons  of  freight  a  month  at  25  cents 
a  ton.  Of  the  $25,000  thus  earned,  $10,000  is  paid  out 
for  the  actual  expenses  of  running  the  trains  and  loading 
or  unloading  the  cars  ;  $5,000  for  repairs  and  general  ex¬ 
penses  ;  the  remaining  $10,000  pays  the  interest  on  the 
cost  of  construction.  Only  the  first  of  these  items  varies 
in  proportion  to  the  amount  of  business  done  ;  the  interest 
is  a  fixed  charge,  and  the  repairs  have  to  be  made  with 

1  The  early  political  economists  dealt  chiefly  with  banking  business,  where 
the  circulating  capital  was  large  and  the  fixed  capital  comparatively  small. 
For  such  business  their  theory  was  true  enough.  But  in  the  business  of  the 
present  day — and  especially  in  railroad  business — the  theory  is  far  from  rep¬ 
resenting  the  real  facts  of  the  case.  Economists  are  far  from  perceiving  the 
full  difference  between  their  assumptions  and  the  reality.  F.  A.  Walker  and 
others  have  shown  how  the  law  of  competition  fails  to  act  smoothly  in  prac¬ 
tice.  Adolph  Wagner  shows  how  its  action  produces  bad  results.  But  they 
ought  to  go  much  farther.  In  the  case  of  industries  with  large  permanent 
investment,  the  law  is  not  merely  imperfect  or  bad  in  practice,  it  is  false  in 
theory. 


COMPETITION  AND  COMBINATION.  7 1 

almost  equal  rapidity,  whether  the  material  wears  out, 
rusts  out,  or  washes  out.  Now  suppose  a  parallel  road  is 
built,  and  in  order  to  secure  some  of  this  business  offers 
to  take  it  at  20  cents  a  ton.  The  old  road  must  meet  the 
reduction  in  order  not  to  lose  its  business,  even  though 
the  neyv  figure  does  not  leave  it  a  fair  profit  on  its  invest¬ 
ment  ;  better  a  moderate  profit  than  none  at  all.  The 
new  road  reduces  to  15  cents;  so  does  the  old  road.  A 
15-cent  rate  will  not  pay  interest  unless  there  are  new 
business  conditions  developed  by  it  ;  but  it  will  pay  for 
repairs,  which  otherwise  would  be  a  dead  loss.  The  new 
road  makes  a  still  further  reduction  to  11  cents.  This 
will  do  little  toward  paying  repairs,  but  that  little  is  better 
than  nothing.  If  you  take  at  11  cents  freight  that  cost 
you  25  cents  to  handle,  you  lose  14  cents  on  every  ton 
you  carry:  If  you  refuse  to  take  it  at  that  rate,  you  lose 
15  cents  on  every  ton  you  do  not  carry.  For  your 
charges  for  interest  and  repairs  run  on,  while  the  other 
road  gets  the  business. 

If  it  be  objected  that  such  a  case  could  not  occur  in 
actual  practice,  the  answer  is  that  it  does  occur  constantly, 
and  almost  as  a  matter  of  course  when  the  competing 
road  is  bankrupt.  “  Business  at  any  price  rather  than  no 
business  at  all,”  is  the  motto  of  such  a  road.  It  has  long 
ceased  to  pay  interest ;  it  can  pay  for  repairs  by  receiver’s 
certificates  ;  and  it  will  take  freight  at  almost  any  price 
which  will  pay  for  the  men  to  load  the  goods  and  the 
coal  to  burn  in  the  engine.  And  be  it  observed  that  when 
a  competing  road  does  not  carry  the  war  to  this  point,  it 
is  not  a  competitive  rate.  They  may  agree  upon  a  25- 
cent  rate,  thinking  that  it  will  be  a  reasonable  and  at  the 
same  time  a  paying  one  ;  but  such  a  rate  is  actually  de¬ 
termined  by  combination,  even  though  they  take  cost  of 


7  2 


RAILROAD  TRANSPORTATION. 


service  into  account.  Ricardo’s  theory  was  based  upon 
the  assumption  that  when  payment  fell  below  cost  of 
service  active  competition  would  cease.  His  theory  fails, 
because,  far  below  the  point  where  it  pays  to  do  your  own 
business,  it  pays  to -steal  business  from  another  man.  The 
influx  of  new  capital  will  cease  ;  but  the  fight  will  go  on, 
either  until  the  old  investment  and  machinery  are  worn 
out,  or  until  a  pool  of  some  sort  is  arranged. 

The  railroad  may  serve  as  a  type  of  modern  business. 
Wherever  there  are  large  permanent  investments  of  cap¬ 
ital  we  see  the  same  causes  at  work  in  the  same  way. 

In  the  year  1870  the  Philadelphia  price  of  No.  I  pig- 
iron  averaged  $33.25  a  ton,  which  probably  represented 
just  about  the  cost  of  production,  including  a  fair  return 
on  the  investment.  The  American  product  for  that  year 
and  the  next  was  about  1,900,000  tons  each.  But  through 
1871  and  the  greater  part  of  1872  prices  were  rising;  the 
average  for  September,  1872,  was  $53.87.  Large  profits 
like  this  attracted  capital  into  the  business;  the  product 
for  1872  was  2,855,000  tons,  and  for  1873,  2,868,000  tons. 
So  far,  Ricardo’s  theory  worked  well.  Then  prices 
dropped  faster  than  they  had  risen.  December,  1873, 
they  were  $32.50  a  ton ;  December,  1874,  they  were 
$24.00.  For  the  year  1878  they  averaged  but  $I7.62.1  But 
the  iron  men  could  not  restrict  their  production  as  fast  as 
they  had  increased  it.  To  allow  their  furnaces  to  go  out 
of  blast  was  to  allow  their  business  to  go  to  ruin.  They 
continued  to  produce  at  a  great  loss,  and  to  fight  more 
desperately  the  greater  the  loss  became.  Some  concerns 
succumbed,  some  pulled  through  to  see  more  prosperous 
times.  But  for  a  period  of  six  years  millions  of  tons  of 

1  Reports  of  James  M.  Swank,  Sec’y  of  the  American  Iron  and  Steel 
Association. 


COMPETITION  AND  COMBINATION. 


7  3 


iron  were  produced  and  sold  below  cost,  their  owners 
being  thankful  if  the  price  paid  would  cover  raw  materials 
and  wages,  without  any  regard  to  interest  or  renewal. 
The  same  thing  is  probably  true  of  the  steel-rail  business 

to-day. 

There  is  a  marked  difference  of  principle  between 
mercantile  competition,  such  as  Ricardo  had  in  mind,  and 
the  competition  of  railroads  or  factories,  such  as  we  have 
been  considering.  In  the  former  case  its  action  is  prompt 
and  healthful,  and  does  not  go  to  extremes.  If  Grocer  A 
sells  goods  below  cost,  Grocer  B  need  not  follow  him,  but 
simply  stop  selling  for  the  time.  For:  I.  This  involves  no 
great  present  loss  to  B.  When  his  receipts  stop,  most  of 
his  expenses  stop  also.  2.  It  does  involve  a  present  loss 
to  A.  If  he  is  selling  below  cost,  he  loses  more  money 
the  more  business  he  does.  3.  It  cannot  continue  in¬ 
definitely.  If  A  returns  to  paying  prices,  B  can  again 
compete.  If  A  continues  to  do  business  at  a  loss  he  will 
become  bankrupt,  and  B  will  find  the  field  clear  again. 

But  if  Railroad  A  reduces  charges  on  competitive  busi¬ 
ness,  Railroad  B  must  follow.  1.  It  involves  a  great 
present  loss  to  stop.  If  a  railroad’s  business  shrinks  to 
almost  nothing,  a  large  part  of  its  expenses  run  on  just 
the  same.  Interest  charges  accumulate  ;  office  expenses 
cannot  be  suddenly  contracted ;  repairs  do  not  stop  when 
traffic  shrinks  ;  for  they  are  rendered  necessary  by  weather 
as  well  as  by  wear.  2.  If  B  abandons  the  business,  A’s 
reduction  of  rates  will  prove  no  loss.  The  expense  of  a 
large  business  is  proportionately  less  than  that  of  a  small 
one.  A  rate  which  was  below  cost  on  100,000  tons  may 
be  a  paying  one  on  200,000.  3.  Profitable  or  not,  A’s 

competition  may  be  kept  up  indefinitely.  The  property 
may  go  into  bankruptcy,  but  the  railroad  stays  where  it 


7  4 


RAILROAD  TRANSPORTATION. 


is.  It  only  becomes  a  more  reckless  and  irresponsible 
competitor.1 

The  competition  of  different  stores  finds  a  natural  limit. 
It  brings  rates  down  near  to  cost  of  service,  and  then 
stops.  The  competition  of  railroads  or  factories  finds  no 
such  natural  limit.  Wherever  there  is  a  large  permanent 
investment,  and  large  fixed  charges,  competition  brings 
rates  down  below  cost  of  service.  The  competitive 
business  gives  no  money  to  pay  repairs  or  interest. 
Sometimes  the  money  to  pay  for  these  things  comes  out 
of  the  pockets  of  other  customers,  who  do  not  enjoy  the 
benefit  of  the  competition,  and  are  charged  much  higher 
rates.  Then  we  have  the  worst  forms  of  discrimination. 
Sometimes  the  money  cannot  be  obtained  from  any 
customers  at  all.  Then  we  have  bankruptcy,  ruin  to  the 
investor,  and — when  these  things  happen  on  a  large  scale 
— a  commercial  crisis. 

There  is  but  one  way  to  prevent  these  results.  If 
competition  is  ruinous  to  all  parties,  all  parties  must  stop 
competing.  If  it  finds  no  natural  limit,  it  must  be  arti¬ 
ficially  limited;  it  must  end  in  combination.  And  the 
moment  you  have  established  an  effective  combination, 
you  have  introduced  the  principle  of  monopoly.  You 
have  determined  prices  not  in  open  market,  but  by  an 
agreement  among  all  the  sellers. 

This  agreement  may  take  any  one  of  four  forms.  I. 
Agreement  to  maintain  rates.  2.  To  divide  the  field. 
3.  To  divide  the  traffic.  4.  To  divide  the  earnings.  The 
last  three  are  commonly  known  as  pools. 

The  first  is  the  simplest,  but  least  effective.  There  is 

1  4d  ims,  pp.  148,  ff.  Testimony  of  E.  D.  Worcester  before  the  Hep- 
bun  C  ommittee,  p.  1074;  of  Albert  Fink,  p.  564.  The  counter-argument 
of  Mr.  Blanchard,  pp.  3033-34,  does  not  hold  generally,  because  in  a  fight 
of  this  kind  recklessness  is  the  most  important  element  of  strength. 


COMPETITION  AND  COMBINATION . 


75 


scarcely  an  organized  industry  where  the  dealers  do  not 
meet  and  settle  upon  a  schedule  of  rates  and  discounts, 
agreeing  that  no  one  shall  sell  below  these  prices.  Such 
agreements  are  rarely  kept.  It  is  for  the  interest  of  all 
that  rates  in  general  should  be  maintained  ;  but  it  is  for 
the  interest  of  each  concern  to  secure  business  for  itself 
by  not  quite  maintaining  them.  This  constitutes  a  great 
temptation  to  depart  from  schedule  prices ;  a  temptation 
all  the  stronger  because  it  is  so  easy  to  violate  the  agree¬ 
ment  indirectly,  and  so  hard  to  detect  any  such  violation. 
The  result  is  apt  to  be  a  system  of  underhand  competi¬ 
tion,  worse  in  many  respects  than  the  open  competition 
which  existed  before  there  was  any  agreement  at  all. 

This  is  why  it  is  found  necessary  to  divide  the  business 
among  the  different  competitors,  by  a  pooling  agreement. 
Such  agreements  are  hard  to  arrange.  There  is  almost 
always  a  dispute  about  their  terms.  But  as  long  as  they 
are  in  force,  it  is  hard  to  violate  them  without  actual 
fraud,  and  it  is  comparatively  easy  to  detect  such  viola¬ 
tions  and  deal  with  them  severely. 

When  it  is  possible  to  “divide  the  field  ”  this  course  is 
usually  the  simplest.  We  see  it  illustrated  where  differ¬ 
ent  gas  or  water  companies  parcel  off  the  different  dis¬ 
tricts  of  a  city  to  one  another ;  or  where  manufacturers 
# 

in  different  cities  agree  to  leave  one  another  in  undis¬ 
turbed  possession  of  the  home  market.  We  see  it  not 
infrequently  in  agreements  between  railroads.  But  in  the 
majority  of  cases  this  arrangement  is  impracticable,  and 
the  rival  concerns  agree  upon  the  proportion  of  business 
which  each  is  to  do.  The  companies  in  the  Anthracite 
Coal  Combination  have  arranged  how  much  coal  each 
company  may  mine.  Factory  combinations  determine 
how  much  each  concern  may  manufacture.  Railroads 


7<5 


RAILROAD  TRANSPORTATION. 


agree  just  what  percentage  of  competitive  traffic  each  road 
shall  carry. 

When  one  railroad  receives  more  than  its  agreed  share 
of  business,  it  is  generally  inconvenient  to  send  the  goods 
by  a  rival  route,  and  easier  to  arrange  matters  by  a  money 
payment.1  This  brings  us  to  the  fourth  and  closest  form 
of  combination,  where  there  is  a  division  of  earnings. 
The  machinery  for  securing  this  division  may  have  any 
degree  of  organization  up  to  the  point  of  actual  consolida¬ 
tion  of  the  competing  interests. 

The  dangers  of  a  pool  lie  in  the  arbitrary  power  which 
it  places  in  the  hands  of  a  few  men  to  deal  as  they  will 
with  the  business  of  the  country.  Even  granting  that  the 
actual  abuses  of  combination  are  less  than  those  of  com¬ 
petition,  it  seems  like  taking  refuge  from  the  excesses  of 
democracy  in  an  enlightened  despotism.  There  is  some 
slight  truth  in  the  analogy,  but  we  are  likely  to  carry  it 
too  far.  Combination  does  not  produce  arbitrary  results 
any  more  than  competition  produces  uniformly  beneficent 
ones.  We  hear  a  great  deal  said  about  charging  “  what 
the  traffic  will  bear  ”  ;  and  the  man  who  avows  this  as  his 
principle  is  compared  by  anti-monopolists  with  the  robber 
barons  of  the  middle  ages.  He  is  represented  as  fleecing 
a  helpless  public  out  of  all  its  hard-won  earnings.  In  the 
proper  meaning  of  the  principle  the  case  is  just  the  oppo¬ 
site.  Charging  what  the  traffic  will  bear  is  a  very  differ¬ 
ent  thing  from  charging  what  the  traffic  will  not  bear.  It 
is  a  hard  principle  to  apply  intelligently  ;  but  when  it  is 
thus  applied  it  adjusts  the  burdens  where  they  can  be  best 
borne,  and  develops  a  vast  amount  of  business  which  could 
not  otherwise  exist.  Our  railroad  management  has  many 


1  For  the  question  of  traffic  vs.  money  pools,  see  Fink :  Argument 
before  the  Select  Committee  of  the  U.  S.  Senate,  May  21,  1885.,  pp.  33-35. 


COMPETITION  AND  COMBINATION 


77 


faults  and  abuses  in  detail ;  but,  taking  its  work  as  a 
whole,  it  has  brought  down  rates  to  a  cheapness  which  is 
unequalled  elsewhere,  and  has  developed  the  business  of  the 
country  on  a  scale  which  would  have  been  impossible  under 
any  system  of  rates  based  on  cost  of  service.  Nor  does  it 
leave  the  door  open  for  inordinate  profits.  The  moment 
a  combination  places  its  figures  so  high  as  to  do  this, 
other  capital  will  seek  investment  in  the  same  line ;  and 
though  these  new  investments  are  apt,  before  long,  to 
come  into  the  pool  at  the  old  rates,  yet  they  have  cut 
down  the  profits  by  their  entrance.  An  amount  of  busi¬ 
ness  which  would  richly  support  one  railroad  or  factory, 
yields  but  a  scant  income  to  two  railroads  or  factories  at 
the  same  rates.  Witness  what  the  “Nickel  Plate”  Rail¬ 
road  has  done  for  the  Lake  Shore,  or  the  West  Shore  Rail¬ 
road  for  the  New  York  Central.  Parallel  roads  do  not  lower 
rates  permanently,  but  they  make  havoc  with  profits.  It 
is  usually  far-sighted  policy  for  a  combination  to  put  its 
rates  so  low  as  not  to  tempt  new  capital  too  rapidly  into 
the  field.  If  that  lesson  is  learned,  the  public  gets  the 
benefits  of  competition  without  its  disadvantages.  Un¬ 
luckily,  we  place  these  combinations  outside  of  the  pro¬ 
tection  of  the  law,  and  by  giving  them  this  precarious  and 
almost  illegal  character  we  tempt  them  to  seek  present 
gain  even  at  the  sacrifice  of  their  own  future  interests. 
We  regard  them,  and  we  let  them  regard  themselves,  as  a 
means  of  momentary  profit  and  speculation,  instead  of 
recognizing  them  as  responsible  public  agencies  of  lasting 
influence  and  importance.1 

There  is  another  aspect  of  our  subject,  still  more  serious 
than  any  we  have  yet  treated,  which  we  can  do  little  more 
than  touch  upon, — the  competition  and  combination  of 


1  See  chap.  vii.  Grosvenor  :  “  American  Securities,”  pp.  200-214. 


;8' 


RA ILR  OA  D  TRA  NSPOR  TA  TION. 


labor.  Labor  is  in  the  market,  like  any  commodity ;  its 
price  is  largely  determined  by  competition,  and  this  too 
often  takes  the  form  of  cut-throat  competition.  A  work¬ 
man  working  for  starvation  wages  is  like  a  factory  or  a 
railroad  running  for  operating  expenses.  In  flush  times 
the  workman  gets  comparatively  good  wages ;  he  marries, 
and  is  able  to  support  a  family  in  reasonable  comfort. 
This  family  becomes  a  fixed  charge  upon  him  ;  and  it  is 
of  the  utmost  importance  to  society  that  he  should  be 
able  to  meet  his  fixed  charges  in  this  respect.  But  a 
commercial  crisis  comes,  and  the  demand  for  labor  dimin¬ 
ishes.  Men  who  have  no  family  to  support  come  into 
direct  competition  with  him.  He  can  better  afford  to 
work  for  what  will  keep  body  and  soul  together  than  not 
to  work  at  all,  even  though  his  wages  are  brought  so  low 
that  his  children  perish  for  lack  of  the  food  which  should 
give  them  strength  to  resist  disease.  And  so  wages  are 
brought  down  to  the  starvation  minimum,  only  to  rise 
above  it  after  long  years  of  waiting  and  misery.  The 
workman  seeks  relief  in  combination ;  but  combination 
is  far  harder  for  him  than  for  the  capitalist.  Where  there 
are  ten  factories  to  combine,  there  may  be  ten  thousand 
workmen  to  be  held  together, — not  to  speak  of  the  almost 
unlimited  floating  labor  supply  which  may  be  brought  in 
at  any  point.  The  law  will  not  help  him.  If  the  law  re¬ 
gards  the  pool  with  disfavor,  it  regards  most  of  the  mani¬ 
festations  of  trades-unionism  with  absolute  hostility.1  No 
wonder  that  our  workmen  try  to  change  the  law ;  no 
wonder  they  call  for  special  statutes  against  labor  impor¬ 
tation  ;  no  wonder  that  they  seek  to  limit  the  supply 
in  the  market  by  a  universal  eight-hour  law.  Whether 

1  W.  S.  Jevons:  “The  State  in  Relation  to  Labor,”  London,  1882, 
chapters  iv.,  v.  J.  E.  Thorold  Rogers  :  “  Six  Centuries  of  Work  and  Wages,” 
London  (and  New  York),  1884,  pp.  .398,  399. 

’  *  »  *t  t  i  '  .#  . 


COMPETITION  AND  COMBINATION. 


79 


rightly  or  wrongly,  we  do  not  here  inquire  ;  it  is  beyond 
our  purpose  to  discuss  what  general  impovement  is  prac¬ 
ticable  in  this  field.  We  only  call  attention  to  the  close 
relation  between  the  two  problems  of  starvation  wages 
and  bankrupt  competition.  If  capitalists  and  workingmen 
can  but  see  this  analogy,  it  may  help  them  to  an  under¬ 
standing  of  one  another’s  position. 

The  socialists,  in  spite  of  their  unpractical  proposals, 
have  the  merit  of  seeing  the  close  relation  between  these 
two  problems.  They  would  solve  them  by  organizing  the 
whole  world  into  a  vast  system  of  pools  and  trades-unions, 
under  the  charge  of  the  State.  This  is  not  a  rhetorical 
figure ;  it  is  a  statement  of  what  the  proposals  of 
many  of  them  distinctly  mean.1  But  they  ignore  two 
overwhelming  arguments  against  their  position.  One  is 
that  government  action  has  many  bad  effects,  even  in  the 
narrow  sphere  of  duties  which  it  to-day  performs  ;  the 
second  is,  that  an  approach  to  the  system  proposed  by 
the  socialist  has  already  been  tried  and  found  wanting, 
under  conditions  far  simpler  than  exist  to-day.  The  or¬ 
ganization  of  business  in  semi-political  guilds  was  tried  in 
the  middle  ages  in  a  great  variety  of  places  and  forms. 
It  developed  the  gravest  abuses,  and  fell  with  its  own  rot¬ 
tenness.  And  yet  the  socialism  of  the  mediaeval  guilds 
had  a  limited  object,  which  was  far  easier  to  attain  than 
any  general  amelioration  of  the  working-classes.  The 
guilds  cared  only  for  those  who  were  engaged  in  handi¬ 
craft.  They  wanted  to  keep  craftsmen’s  wages  high. 
The  great  land-owners  wanted  to  keep  agricultural  wages 
low.  Towns  and  lords,  between  them,  did  all  they  could 
to  prevent  any  one  from  entering  a  craft,  and  to  keep  him 

1  Gronlund  :  “The  Co-operative  Commonwealth,”  Boston,  1S84,  pp.  129, 
145,  and  elsewhere. 


8o 


RA ILR  OA  D  TRA  NSPOR  TA  TION . 


in  agriculture.  The  effects  of  this  legislation  upon  the 
rural  laborer  were  outrageous,  and  he  could  do  nothing 
to  help  himself.  The  guilds  were  organized  ;  for  any  one 
else,  the  least  attempt  at  organization  was  a  crime.1 
The  English  combination  laws,  which,  down  to  the  pres¬ 
ent  century,  were  so  infamous,  were  made  to  prevent  agri¬ 
cultural  laborers  from  enjoying  the  benefits  which  were 
granted  to  their  oppressors.  In  France  and  Germany, 
under  the  old  regime,  the  case  was  worse  than  in  England. 
It  can  hardly  be  too  much  to  say  that  ninety-nine  hun¬ 
dredths  of  all  the  state  interference  of  this  kind  has  been  class 
legislation,  and  that  any  apparent  prosperity  at  one  point, 
which  it  has  induced,  has  been  dearly  purchased  at  another. 

While  the  experiments  in  state  socialism  have  been  so 
often  bad,  there  has  been  a  tendency  in  a  great  many 
cases  to  go  too  far  to  the  opposite  extreme,  and  to  call 
every  thing  bad  which  restricted  competition  in  any  way. 
Courts  and  legislators  have  tried  to  stop  the  growth  of 
industrial  monopoly  by  shutting  their  eyes  to  industrial 
facts.  They  have  tried  to  prohibit  such  combinations 
altogether,  the  courts  saying  that  they  would  not  enforce 
contracts  in  restraint  of  trade,  the  legislators  trying  to 
render  it  illegal  to  make  such  contracts. 

They  could  not  stop  such  combinations,  because  they 
were  a  necessity  of  business.  The  result  of  trying  to  pro¬ 
hibit  them  was  what  always  happens  when  you  try  to 
prohibit  a  necessity  ;  the  worse  features  of  the  system 
were  intensified.  Secret  combination  was  substituted  for 
open  ;  short-sighted  and  arbitrary  policy  was  encouraged. 
By  prohibiting  the  whole  system,  the  courts  deprived 
.themselves  of  the  power  of  dealing  with  specific  evils,  such 
as  secret  favors,  or  arbitrary  discriminations. 


1  Jevons,  pp.  33,  34. 


COMPETITION  AND  COMBINATION 


8l 


In  Europe,  and  especially  Continental  Europe,  the  case 
is  different.  They  prohibit  most  of  the  specific  evils 
strictly  and  effectively.  But  they  do  not  prohibit  pools. 
They  recognize  them  as  a  necessity.  The  railroads  owned 
and  managed  by  government  themselves  enter  into  pool¬ 
ing  arrangements  with  those  of  private  companies  with 
which  they  come  into  competition.  With  all  the  police 
power  which  the  German  Government  controls — a  power 
a  hundred-fold  greater  than  any  thing  we  have  in  this 
country — and  with  all  its  dread  of  irresponsible  combina¬ 
tions,  it  sees  that  pools  are  not  a  thing  which  can  be  pre¬ 
vented,  and  that  the  only  way  to  control  them  is  to 
recognize  them  as  legal,  and  then  hold  them  responsible 
for  any  evils  which  may  arise  under  their  management.1 

The  sooner  we  reach  the  same  conclusion  in  America, 
the  better  for  all  parties  concerned.  The  attempt  to  bury 
the  difficulties  by  thrusting  our  own  heads  into  the  sand 
has  already  lasted  too  long.  We  must  face  the  inevitable 
as  inevitable,  and  do  the  best  we  can  to  regulate  it.  To 
meet  the  difficulties  successfully  will  be  a  hard  problem. 
But  to  evade  them  has  proved  an  impossible  one.2 

1  See  chap.  xiii.  See  also  P.  P.  Gazette ,  1884,  p.  636. 

2  T.  M.  Cooley  :  “  Popular  and  Legal  Views  of  Traffic  Pooling.”  Chicago, 
1884.  This  pamphlet,  originally  published  as  an  article  in  the  Pailway 
Review ,  is  a  work  of  great  value. 

In  the  case  of  The  Central  Trust  Co.  vs.  The  Ohio  Central  Railroad  Co., 
the  U.  S.  Circuit  Court  has  just  rendered  a  decision  enforcing  pooling  con¬ 
tracts  under  certain  circumstances.  Both  the  decision  itself,  and  the  argu¬ 
ment  of  Mr. -Stevenson  Burke,  are  worthy  of  careful  attention. 


CHAPTER  V. 


COMPETITION  AND  COMBINATION  IN  PRACTICE. 

Early  railroad  consolidation — Scott — Vanderbilt — The  trunk-line  systems — • 
Railroad  geography  of  the  United  States — Means  of  handling  through 
traffic — Fast  freight  lines — Advantages  and  disadvantages — Struggles  for 
competitive  traffic — Railroad  pools  in  the  West  ;  in  the  South — Trunk¬ 
line  wars — Contests  between  cities — Arrangements  made  in  1877-79 — 
Effect  upon  water  routes — Railroad  war  of  1881 — Principles  involved — 
Present  state  of  affairs. 

Charles  Francis  Adams,  Jr.  :  “Railroads  and  Railroad  Questions,”  New 
York,  1878,  pp.  148-213.  (Also  issued  under  the  title  “  Railroads,  their 
Origin  and  Problems.”) 

Reports  of  Joseph  Nimmo,  Jr.,  Chief  of  the  Bureau  of  Statistics,  on  the 
Internal  Commerce  of  the  United  States — especially  that  for  1879. 

Report  of  the  Special  Committee  on  Railroads,  appointed  under  a  resolu¬ 
tion  of  the  N.  Y.  Assembly,  Feb.  28,  1879. 

This  is  commonly  known  as  the  Hepburn  Committee  Report.  The  5,000 
pages  of  testimony  form  by  far  the  best  authority  on  certain  matters  of  rail¬ 
road  management  which  has  ever  appeared  in  print.  The  most  valuable  part 
is  the  testimony  of  G.  R.  Blanchard,  who  represented  the  management  of  the 
Erie  Railway.  Mr  Blanchard’s  other  utterances  on  the  subject  are  also  im¬ 
portant. 

Albert  Fink’s  successive  reports  and  arguments  before  legislative  committees 
furnish  material  of  the  highest  value.  For  many  other  authorities  dealing 
more  or  less  directly  with  this  subject,  see  next  chapter. 

The  principles  dealt  with  in  the  last  chapter  have  been 
developed  at  some  length,  because  they  are  necessary  to 
any  true  understanding  of  recent  railroad  history,  or  to 
any  intelligent  judgment  on  matters  of  railroad  legislation. 

It  is  only  in  the  last  few  years  that  they  have  become 
thus  important.  The  earlier  railroad  combinations  could 

82 


COMPETITION  AND  COMBINATION. 


83 


be  easily  understood  without  them.  These  earlier  com¬ 
binations  were  for  the  most  part  mere  consolidations  of 
different  links  into  one  connecting  line.  Take,  for  in¬ 
stance,  the  growth  of  the  Vanderbilt  system.  In  1853  the 
New  York  Central  was  formed  by  the  consolidation  of 
what  had  been  originally  eleven  railroads  :  Albany  and 
Schenectady,  Schenectady  and  Troy,  Utica  and  Schenec¬ 
tady,  Syracuse  and  Utica,  Auburn  and  Syracuse,  Auburn 
and  Rochester,  Rochester  and  Syracuse  direct,  Rochester, 
Lockport,  and  Niagara  Falls,  Buffalo  and  Lockport,  Tona- 
wanda,  Attica,  and  Buffalo.  From  1855  to  1858,  the 
system  thus  formed  gained  control  of  five  more  roads : 
Rochester  and  Lake  Ontario,  Buffalo  and  Niagara  Falls, 
Lewiston,  Athens  Branch,  Niagara  Bridge  and  Canan¬ 
daigua.  Then  came  Vanderbilt’s  achievements  :  the  union 
with  the  Hudson  River  Railroad  and  the  Harlem  on  the 

1 

the  east ;  and  (in  some  sense)  with  the  Lake  Shore  and 
Michigan  Southern,  the  Canada  Southern,  the  Michigan 
Central,  the  New  York,  Chicago  and  St.  Louis,  on  the 
west ;  the  whole  system  including  more  than  four  thousand 
miles  of  line. 

This  is  simply  one  instance  among  many.  If  we  trace 
back  the  history  of  almost  any  of  our  large  railroads  we 
find  that  they  were  formed  by  the  consolidation  of  many 
smaller  ones.  Such  a  course  of  events  was  a  necessity. 
As  long  as  railroads  were  purely  local  affairs,  each  locality 
might  charter  and  run  its  own.  The  moment  any  large 
through  traffic  grew  up,  this  was  found  to  be  a  wasteful 
way  of  doing  business.  If  they  changed  cars  at  every 
point  of  junction,  the  expenses  were  vastly  increased.  If 
they  did  not  change  cars,  there  was  still  the  awkwardness 
of  dividing  responsibility,  and  the  evil  of  having  two  sep¬ 
arate  organizations  where  one  would  do  the  work  better. 


84 


RAILROAD  TRANSPORTATION. 


It  required  no  special  training  to  see  the  necessity  of  such 
consolidation,  and  no  extraordinary  business  talent  to 
carry  it  through. 

But  there  was  a  point  beyond  which  these  matters  did 
not  take  care  of  themselves,  and  could  only  be  managed 
by  great  leaders.  The  trunk  lines  of  the  country  reached 
this  point  about  twenty  years  ago.  At  that  time  the 
main  routes  were  pretty  well  consolidated  as  far  as  the 
Ohio  River  or  the  eastern  end  of  Lake  Erie;  for  their 
through  connections  to  Chicago  or  St.  Louis,  they  made 
use  of  independent  roads.  The  men  who  did  most  to 
change  this  state  of  things  were  Cornelius  Vanderbilt  and 
Thomas  Alexander  Scott.  Scott  began  earlier  and  went 
farther;  but  there  was  a  dashing  quality  about  Vander¬ 
bilt’s  doings  which  make  him  the  central  figure  in  this 
movement. 

Scott  entered  the  service  of  the  Pennsylvania  Rail¬ 
road  in  1850.  He  was  rapidly  promoted  and  soon  made 
his  influence  felt  in  the  policy  of  the  road.  In  i860  he 
became  Vice-President  chiefly  through  the  exertions  of  J. 
Edgar  Thomson,  who  gave  him  active  support  in  all  his 
projects.  They  had  already  secured  possession  of  the 
Philadelphia  and  Erie,  and  were  busy  with  other  schemes 
of  the  same  sort,  when  the  war  interrupted  all  these  plans. 
At  the  close  of  the  war  they  were  pushed  on  with 
renewed  activity ;  the  system  was  extended  westward  to 
Chicago,  St.  Louis,  and  Cincinnati,  southward  to  Balti¬ 
more,  eastward  all  over  New  Jersey,  and  northward  as  far 
as  Lake  Ontario.  Scott  himself  went  far  beyond  these 
limits,  and  was  personally  brought  into  financial  trouble 
in  1873  in  connection  with  the  Texas  Pacific.  These 
things  did  not,  however,  involve  the  company,  nor  did 
they  interfere  with  his  position  at  its  head.  On  the  death 


COMPETITION  AND  COMBINATION. 


85 


of  Thomson  in  1874,  Scott  was  elected  president  and  held 
this  position  till  1880,  a  year  before  his  death.  As  a 
result  of  his  policy,  the  Pennsylvania  Railroad  and  its 
alter  ego  the  Pennsylvania  Company,  together  control 
nearly  seven  thousand  miles  of  the  most  valuable  railroad 
property  in  the  United  States. 

Vanderbilt  was  thirty  years-older  than  Scott,  but  he  did 
not  go  into  railroad  business  until  several  years  later  than 
his  rival.  Through  his  early  life  he  had  been  a  steamboat 
captain,  and  in  the  years  1850-1860  he  was  one  of  the 
foremost  steamboat  owners  in  the  world.  But  his  busi¬ 
ness  sagacity  led  him  to  foresee  the  future  of  the  railroad 
system ;  and  about  the  beginning  of  the  war  he  gradually 
withdrew  from  the  sea,  to  invest  his  capital  on  land.  In 
1863  he  began  buying  Harlem  as  an  investment.  He 
bought  some  of  it  at  .03  ;  thanks  to  the  operations  of 
those  who  tried  to  break  him  down  by  selling  it  short,  he 
carried  it  up  to  285.  He  went  into  Hudson  River  in 
1864;  in  1867,  after  some  opposition,  he  secured  control 
of  the  New  York  Central,  and  consolidated  it  with  the 
Hudson  River  Railroad  in  1869.  In  a  desperate  attempt 
to  gain  control  of  Erie  he  was  foiled ;  but  he  and  his 
friends  were  more  successful  in  their  efforts  further  west, 
on  the  Lake  Shore  and  the  Canadian  roads.  There  were 
thus  finally  united  under  one  general  management  (though 
not  under  one  concern  as  in  the  Pennsylvania  system) 
some  four  thousand  miles  of  railroad  between  New  York 
and  Chicago. 

Parallel  to  these,  but  more  slowly,  were  developed  three 
other  trunk-line  systems — the  Grand  Trunk  on  the  north, 
the  Erie  in  the  middle,  and  the  Baltimore  and  Ohio  on 
the  south.  The  early  development  of  these  systems  had 
been  to  a  certain  extent  retarded — in  the  case  of  the 


86 


RAILROAD  TRANSPORTATION. 


Grand  Trunk  by  disadvantages  of  situation,  in  the  case  of 
the  Erie  by  speculative  management,  in  the  case  of  the 
Baltimore  and  Ohio  by  the  war.  But  though  not  equal 
in  strength  to  the  systems  first  named,  each  of  these 
controls  from  two  thousand  to  three  thousand  miles  of 
line  between  the  seaboard  and  the  Mississippi  valley. 
The  tendency  toward  consolidation  on  parallel  lines  is 
the  distinctive  feature  of  railroad  geography  in  this  part 
of  the  country.  The  West  Shore,  the  Lackawanna,  the 
Chesapeake  and  Ohio,  are  instances  of  this  which  have 
come  up  within  the  last  few  years.  Certain  systems 
between  the  Lakes  and  the  Ohio  River,  like  the  Cleve¬ 
land,  Columbus,  Cincinnati,  and  Indianapolis,  resist  the 
tendency,  but  find  it  hard  work  to  do  so.  West  of 
Chicago  and  St.  Louis  the  rival  lines  do  not  run  parallel, 
but  radiate  from  common  centres.  They  reach  out  in  all 
directions  to  collect  grain  for  the  great  western  markets. 
From  Chicago  we  have,  beginning  on  the  north,  first  the 
St.  Paul,  and  then  the  Northwestern  system,  each  with 
about  five  thousand  miles  of  line,  then  the  Rock  Island 
with  fifteen  hundred,  the  Chicago,  Burlington,  and  Quincy 
with  four  thousand,  the  Chicago  and  Alton  with  about 
one  thousand,  and  the  Illinois  Central  with  two  thousand. 
These  systems  have  grown  and  consolidated  even  more 
rapidly  than  the  trunk  lines.  From  St.  Louis  we  have 
the  same  sort  of  radiation,  only  here  one  company,  the 
Missouri  Pacific,  has  become  overwhelmingly  strong,  and 
controls  six  thousand  miles,  or,  with  the  closely  allied 
Wabash  system,  ninety-five  hundred  miles.  Farther  to 
the  west,  beyond  the  Missouri  River,  parallel  lines  of  trans« 
continental  traffic  again  take  the  place  of  radiating  ones. 
It  is,  however,  too  soon  to  tell  what  shape  these  systems 
in  the  extreme  West  will  finally  take,  and  whether  we  may 
not  have  a  gigantic  general  consolidation  of  all  lines. 


COMPETITION  AND  COMBINATION 


8  7 


In  the  States  south  of  the  Potomac  and  east  of  the 
Ohio,  the  western  form  of  railroad  geography  is  reversed. 
Instead  of  railroads  radiating  from  the  central  markets 
toward  the  points  of  production,  the  points  of  production 
are  in  the  centre  and  the  markets  lie  all  around  the  edge 
of  the  district — on  the  seaboard,  the  Gulf,  the  Mississippi, 
or  the  Ohio.  There  is  an  inward  radiation  instead  of  an 
outward  one.1  In  the  Northeastern  States  consolidation 
has  not  taken  place  on  nearly  so  large  a  scale  as  in  other 
parts  of  the  country,  and  especially  not  on  as  long  lines. 
There  has  been  consolidation  by  districts,  rather  than  con- 
•  solidation  into  extended  systems. 

The  efforts  to  secure  unity  of  management  in  certain 
details  went  far  beyond  the  limits  of  actual  consolidation. 
This  unity  was  most  necessary  in  the  handling  of  through 
passengers  and  freight.  To  transship  frequently,  in¬ 
volved  great  trouble  and  expense.  On  the  other  hand, 
for  a  road  to  let  its  own  cars  pass  on  to  other  lines  without 
any  one  to  look  after  them,  involved  the  danger  of  serious 
loss.  The  first  solution  tried  on  a  large  scale  was  to  ac¬ 
commodate  the  through  traffic  by  special  cars,  owned  and 
looked  after  by  a  company  which  was,  at  least  nominally, 
quite  distinct  from  any  of  the  railroads  over  which  the 
cars  were  run.  Thus  there  grew  up  sleeping-car  companies, 
express  companies,  or  freight-transportation  companies. 

In  the  passenger  and  express  business,  the  system  has 
continued  till  the  present  day.  The  express  company  owns 
the  cars  and  assumes  the  responsibility  to  the  public  ;  it 
runs  its  cars  under  a  contract  with  each  railroad.2 3  The 

1  The  strongest  individual  system  in  this  district  is  the  Louisville  and  Nash¬ 
ville,  which  with  its  affiliated  lines  includes  over  three  thousand  miles  of 

road. 

3  These  contracts  take  the  most  varied  forms.  U.  S.  Census,  1880,  vol. 
iv.,  pp.  594-612  (bottom  figures). 


88 


RAILROAD  TRANSPORTATION. 


sleeping-car  arrangements  have  the  same  general  form  ;  on 
their  face  they  are  usually  more  unfavorable  to  the  rail¬ 
road.  But  the  through-freight  business  has  gradually 
taken  a  different  shape.  The  earliest  form  of  fast-freight 
line  was  organized  like  an  express  company — it  owned  the 
cars,  assumed  the  responsibility,  collected  all  it  could  from 
the  public,  and  paid  the  railroads  a  car-load  rate  very  much 
smaller  than  what  it  charged  the  public.  Some  of  these 
lines  still  exist — the  Merchants  Despatch  Transportation 
Company  is  an  important  instance.  But  it  was  found  that 
these  lines  afforded  great  opportunities  for  corruption. 
The  directors  of  railroads  would  buy  stock  in  the  trans¬ 
portation  company,  and  then  give  this  company  a  contract 
which  enriched  it  (and  them)  at  the  expense  of  the  stock¬ 
holders  whose  interests  were  entrusted  to  their  charge. 
An  effort  was  made  to  avoid  these  abuses,  by  paying  the 
freight  charges  to  the  railroads,  and  giving  the  transporta¬ 
tion  company  a  certain  percentage  as  its  commission. 
This  was  only  partially  successful.1 

A  much  more  useful  device  was  the  co-operative  fast- 
freight  line,2  which  avoids  the  abuses  of  the  old  system, 
and  now  prevails  all  but  universally.  It  avoids  all  steal¬ 
ing,  because  there  is  nothing  to  steal.  A  co-operative 
freight  line  has  very  few  expenses,  and  no  earnings  at  all. 
It  is  nothing  more  than  a  system  of  looking  after  cars  and 
keeping  accounts.  The  principle  is  this  :  Each  road  con¬ 
nected  with  the  line  sets  apart  a  certain  number  of  cars  for 
line  freight.  It  marks  them  with  some  distinguishing 

1  Hepburn  Committee  Report,  p.  9,  testimony  (Blanchard),  pp.  2959-62. 

3  Hepburn  Committee  Report,  p.  8,  testimony,  p.  2963  ff. 

Testimony  before  U.  S.  Senate  Com.  on  Transp.  Routes  to  the  Seaboard, 
43d  Cong.,  1  Sess.,  307,  part  2,  pp.  360-65. 

J.  D.  Hayes  in  U.  S.  Internal  Commerce  Report,  1876-77,  Appendix, 
pp.  49-60. 


COMPETITION  AND  COMBINATION 


89 


color  or  mark,  but  continues  to  own  them.  Each  road 
lets  the  line  cars  of  other 'roads  pass  freely  over  its  own 
track  without  transshipment.  It  collects  the  transporta¬ 
tion  charges  on  its  own  part  of  the  route,  no  matter  whose 
the  cars  may  be.  It  reports  the  movements  of  the  cars  to 
the  central  office  of  the  line.  In  the  accounts  of  this 
office,  a  certain  sum  1  (say  £  cts.  per  mile  run)  is  charged 
against  the  road  for  the  use  of  the  cars  of  other  roads  on 
its  own  line  ;  and  it  is  credited  with  a  like  amount  for 
every  mile  that  its  cars  have  been  used  on  other  roads. 
The  fast-freight  line  thus  acts  as  a  car-clearing  house  to 
settle  debits  and  credits  for  the  use  of  the  cars  of  other 
roads.2  It  cannot  be  made  a  means  of  fraud,  any  more 
than  a  clearing-house  can  be  made  a  means  of  fraud.  It 
has  no  receipts  of  its  own.  The  sum  of  the  debit  balances 
for  one  set  of  roads  must  equal  the  sum  of  the  credit 
balances  for  the  rest,  leaving  the  line  itself  neither  the 
gainer  nor  the  loser.  Only  in  case  of  loss  or  damage 
does  the  freight  line  receive  money  not  due  to  some  other 
road  or  roads  ;  and  the  money  thus  received  is,  of  course, 
paid  out  to  the  shipper.  The  only  real  payments  to  the 
line  as  such,  are  paid  to  be  spent  for  salaries  and  office  ex¬ 
penses.  As  for  the  line  itself,  it  is  neither  a  corporation 
nor  a  partnership.  It  is  simply  a  set  of  arrangements  for 
carrying  out  certain  contracts  between  several  railroads. 
The  very  agents  of  the  line,  in  their  dealings  with  the 
public,  are  responsible  only  for  some  specific  road  or 
roads,  and  not  for  the  line  as  such. 

This  total  absence  of  all  possibility  of  cheating  caused 
the  cooperative  freight  line  to  grow  rapidly  in  favor.  The 

1  Varying  according  to  the  condition  of  the  track — largest  in  the  South, 
smallest  on  the  trunk  lines. 

*  The  New  England  Car  Clearing-House  in  Boston  does  the  same  sort  of 
work  under  more  complicated  conditions. 


90 


RAILROAD  TRANSPORTATION. 


Erie  road  reduced  the  expense  of  looking  after  through 
freight  from  about  nine  per  cent  of  the  earnings  on  such 
freight  (its  previous  figure)  to  three  per  cent.  This  was 
done  by  simply  changing  from  the  old  form  of  freight  line 
to  the  cooperative  form.1 

This  is  the  great  advantage  of  the  cooperative  freight 
line  system.  It  also  has  the  advantage  that  it  causes  the 
rolling  stock  to  be  rapidly  utilized.  The  disadvantages  of 
the  system  lie  in  the  lack  of  responsibility,  due  to  the  ex¬ 
tremely  loose  character  of  the  agreements  under  which 
the  freight  line  is  managed.  The  absence  of  any  power 
which  can  steal  involves  the  absence  of  any  power  which 
can  be  held  responsible  for  damages  or  abuses.  The 
shippers  feel  this  evil  quite  constantly.2  The  railroads 
themselves  feel  it  occasionally.  The  through  freight  of  a 
railroad  may  be  dependent  upon  the  discretion  of  the 
soliciting  agents  of  a  fast-freight  line, — agents  living  per¬ 
haps  a  thousand  miles  away.  These  agents  are  responsi¬ 
ble  to  no  authority  except  that  of  their  own  roads.  Yet 
on  their  uncontrolled  discretion — or  indiscretion — the 
policy  and  the  prosperity  of  distant  lines  may  become  ab¬ 
solutely  dependent.  This  is  strongly  felt  in  the  case  of 
great  railroad  wars  ;  it  is  perhaps  the  most  fruitful  cause 
of  such  wars.3 

Thus  the  very  means  which  bound  connecting  roads 
more  closely  together  only  caused  a  sharper  rivalry  be¬ 
tween  different  systems  which  were  not  thus  bound. 
Railroad  wars  became  more  and  more  severe.  As  long  as 
the  competitive  strife  was  merely  local,  it  was  of  but 

1  Blanchard  :  Test,  before  Sen.  Com.  on  Transp.  Routes  (1873),  p.  364. 

2  Proceedings  of  the  New  York  Board  of  Trade  and  Transportation,  1884, 
pp.  32-42. 

8  For  the  effect  of  irresponsible  freight  agents  in  causing  railroad  wars,  see 
Hepburn  Com.  Testimony,  pp.  520,  522  (Fink),  3007  ff.  (Blanchard). 


COMPETITION  AND  COMBINATION. 


91 


1 


trifling  importance.  When  it  extended  over  thousands  of 
miles,  and  involved  millions  of  tons  of  freight  movement 
— not  to  say  millions  of  dollars  loss  to  stockholders — it 
became  a  matter  of  national  concern.  Such  wars  could 
only  end  in  consolidation  or  pooling ;  and  as  the  railroad 
systems  themselves  became  larger,  public  interest  in  rail¬ 
road  pools  rapidly  increased. 

The  earliest  railroad  pools  were  probably  developed  in 
New  England,  but  they  were  on  a  small  scale,  and  the 
whole  thing  was  often  so  quietly  done  that  their  very  ex¬ 
istence  was  almost  unsuspected.  The  first  railroad  pool 
which  has  had  an  important  public  history  was  the  Chi- 
cago-Omaha  pool,  established  in  1870.1 2  Chicago  and 
Omaha  were  connected  by  three  roads,  almost  exactly 
equal  in  length,  and  not  far  different  from  one  another  in 
financial  resources.  Their  through  business  was  so  im¬ 
portant  that  they  could  not  afford  to  reduce  rates  to  a 
cut-throat  point.  An  equal  division  was  so  obviously 
fjair  that  it  was  maintained  for  many  years  without  much 
bickering.  As  long  as  the  original  conditions  remained 
the  same,  there  was  little  trouble.  The  pool  went  through 
the  Granger  movement  unshaken.  It  was  subsequently 
joined  by  other  roads.  Its  original  form  was  broken  up  in 
1884,  because  the  systems  which  composed  it  had  out¬ 
grown  the  limits  to  which  the  old  framework  could  be 
stretched.  But  the  principle  was  by  no  means  abandoned. 
Each  year  had  seen  it  more  and  more  widely  extended. 
A  Southwestern  Association,  dealing  with  the  traffic  of 
St.  Louis  as  well  as  of  Chicago,  was  established  in  1876,  and 
had  an  important  though  somewhat  checkered  career.3 
Pools  were  established  from  Chicago  to  the  Ohio  River  on 


1  U.  S.  Internal  Commerce  Report,  1879,  pp.  175  ff. 

2  Intern.  Com.  Rep.,  1879,  p.  174  ;  Appendix,  pp.  51,  52. 


92 


RAILROAD  TRANSPORTATION. 


the  southeast,  and  to  Minnesota  on  the  northwest,  while 
beyond  the  Missouri  they  were  extended  to  include  the 
traffic  of  Colorado  and  other  southwestern  points,  and 
finally  the  trans-continental  traffic  as  far  as  the  Pacific 
coast  itself. 

Not  quite  so  extensive,  but  far  more  completely  devel¬ 
oped,  were  the  pooling  arrangements  in  the  country  south 
of  the  Potomac  and  the  Ohio.1  The  competition  in  cer¬ 
tain  districts  of  the  South  had  been  even  more  reckless 
and  ruinous  than  elsewhere.  A  few  railroads  in  Georgia 
attempted  (1873)  to  avoid  these  evils  by  combination. 
Out  of  this  attempt  grew  the  Southern  Railway  and 
Steamship  Association.  It  was  well  managed  from  the 
first,  and  within  three  years  from  its  organization  it  had 
come  to  include  nearly  the  whole  railroad  system  of  the 
South  and  a  large  number  of  connecting  or  competing 
steamship  lines.  It  was  nominally  a  “  net  money  pool,” 
that  is  to  say,  any  road  carrying  more  than  its  share  of 
the  through  traffic  paid  its  rivals  the  excess  receipts,  less 
a  certain  allowance  for  expenses  of  carrying ;  but  this 
allowance  for  expenses  was  purposely  made  too  small,  in 
order  to  take  away  from  the  roads  all  inducements  to  run 
ahead  of  their  percentages.  But  the  Southern  Associa¬ 
tion  was  something  more  than  a  mere  system  of  pooling 
contracts.  Its  object  was  not  simply  to  settle  what  shares 
of  competitive  traffic  each  line  should  carry,  but  also  to 
facilitate  the  handling  of  through  traffic.  This  it  did  by 
establishing  bases  of  classification,  rates,  etc. ;  but  above 
all  by  the  establishment  (1875)  of  a  clearing  house  to  settle 
the  through-traffic  accounts.  All  these  things  were  done 
after  discussion  by  an  advisory  board  consisting  of  one 
delegate  from  each  railroad  ;  but  the  executive  officer  was 


1  Fink,  in  U.  S.  Internal  Commerce  Report,  1876,  Appendix,  pp.  12-24. 


COMPETITION  AND  COMBINATION.  93 

not  bound  by  the  opinion  of  the  majority.  The  man  who 
organized  the  association,  and  acted  as  its  executive  officer 
until  called  to  a  wider  field  of  activity,  was  Albert  Fink. 

The  necessity  for  trunk-line  pools  did  notarise  until  the 
heavy  trunk-line  traffic  was  developed.  For  a  long  time 
this  was  relatively  unimportant,  because  so  much  was  car¬ 
ried  by  water.  The  Lakes,  the  Erie  Canal,  and  the  Hud¬ 
son  River  formed  an  unrivalled  line  of  transportation  to 
the  east.  The  Mississippi  River  on  the  south  was  almost 
equally  efficient.  When  it  cost  the  railroads  two  cents  a 
mile  to  transport  a  ton  of  freight,  the  long-distance  freight 
went  by  water  as  a  matter  of  course.  Only  on  the  higher 
class  of  goods,  where  speed  was  quite  as  important  as 
economy,  could  the  railroads  compete  with  decided  advan¬ 
tage  when  the  canals  were  open. 

But  a  series  of  changes  1  made  it  possible  for  the  rail¬ 
roads  to  compete  for  this  through  traffic  ;  and  the  moment 
they  undertook  to  do  so  they  found  it  a  prize  worth 
fighting  for.  These  wars  on  a  large  scale  began  in  1869, 
when  the  New  York  Central  and  the  Pennsylvania  each 
had  obtained  virtual  control  of  its  Chicago  connection.2 
In  1868  rates  from  Chicago  to  New  York  stood  at  $1.88 
per  100  pounds  for  first-class  goods,  and  $0.82  for  fourth- 
class.  In  the  summer  erf  1869  they  fell,  under  the  stress 
of  competition,  to  a  common  rate  of  $0.25  per  100  pounds 
on  all  classes.  With  railroad  methods  as  they  existed  at 
the  time,  such  a  reduction  could  not  be  maintained,  and 
in  the  following  years  (1870-74)  they  were  at  least  nominally 
kept  at  figures  of  $i.oo-$i.50  for  first-class,  and  $o.6o-$o.8o 
for  fourth.  But  in  the  year  1874  a  new  element  of  dis- 


1  See  chap.  vi. 

3  “Statistics  Concerning  the  Movement  of  East-bound  and  West-bound 
Traffic  over  the  Trunk  Lines  and  Connecting  Roads.”  New  York,  1884. 


94 


RAILROAD  TRANSPORTATION. 


turbance  appeared.1  The  Baltimore  and  Ohio  secured  its 
Chicago  connection,  and  almost  immediately  afterward 
the  Grand  Trunk  began  operations  as  a  competitor  on  a 
line  connecting  Milwaukee  and  Detroit  with  the  northern 
Atlantic  ports.  The  efforts  of  the  New  York  Central  and 
Pennsylvania  systems  to  maintain  rates  were  rendered  of 
no  effect  by  the  recklessness  of  the  Grand  Trunk  and  the 
offishness  of  the  Baltimore  and  Ohio  ;  while  the  bank¬ 
rupt  condition  of  the  Erie  made  it  almost  impossible  for 
it  to  pursue  a  conservative  policy  in  these  matters.  The 
year  1875  was  passed  in  feverish  excitement;  1876  saw 
the  beginning  of  a  wild  railroad  war.  First-class  rates 
were  quoted  at  25  cts.  per  hundred,  fourth  class  at  i6cts. ; 
actual  rates  went  much  lower. 

It  is  needless  to  say  that  railroad  profits  fell  rapidly. 
But  the  effects  went  far  outside  the  circle  of  railroad  stock¬ 
holders.  The  canal  lost  business,  and  the  reduction  of 
tolls  which  was  hurriedly  made  could  not  prevent  this 
loss.2  The  canal  was  no  longer  the  dominant  power  which 
it  once  had  been.  And  this  loss  of  importance  of  the 
canal  was  a  relative  loss  of  importance  to  New  York  City. 
As  long  as  the  canal  was  distinctly  the  best  route,  the  port 
of  New  York  had  a  kind  of  monopoly;  and  the  owners 
of  the  various  monopoly  rights  used  them  remorselessly. 
High  charges  were  imposed,  vexatious  and  uneconomical 
ways  of  doing  business  were  enforced.  When  Baltimore, 
Philadelphia,  and  Boston  became  competitors,  traffic  at 
those  points  was  burdened  with  no  such  restrictions.3 
Every  facility  was  afforded  for  handling  the  through  trade 

1  Adams,  “  Railroads,”  pp.  154  ff. 

3  Compare  Fink  :  Rep.  on  Adjustment  of  R.  R.  Transp.  Rates  (N.  Y. , 
1882),  p.  40. 

8  Hepburn  Com.  Rep.,  pp.  22-26.  Compare  W.  N.  Black  :  “  Storage  and 
Transportation  in  the  Port  of  New  York,”  1884. 


COMPETITION  AND  COMBINATION. 


95 


cheaply.  Under  these  circumstances  their  commerce 
grew  rapidly,  while  that  of  New  York  did  not.  To  the 
fight  between  railroads  was  thus  added  a  fight  between 
cities,  which  gave  new  intensity  to  the  contest. 

The  fight  ended  in  1877,  not  because  any  thing  was 
settled,  but  because  all  parties  were  exhausted.  As  be¬ 
tween  the  different  cities  it  resulted  in  a  compromise. 
Philadelphia  was  given  a  small  advantage  over  New  York 
in  the  matter  of  rates  from  the  West,  Baltimore  a  still 
smaller  advantage  over  Philadelphia.  That  any  difference 
at  all  should  be  allowed  was  a  concession  on  the  part  of 
the  New  York  roads  ;  but  the  differences  were  much  less 
than  those  for  which  Baltimore  and  Philadelphia  had  been 
contending. 

On  the  part  of  the  railroads  the  results  were  more 
definite.  They  not  only  stopped  fighting,  but  they  made 
arrangements  to  prevent  such  fighting  in  future  by  pools. 
Trunk-line  pools  had  not  been  quite  unknown  1  ;  but  they 
had  generally  been  managed  by  outside  parties2 3  (eveners), 
in  such  a  way  as  to  intensify  the  abuses  to  which  the  sys¬ 
tem  was  liable.  Now  the  roads  took  the  matter  in  hand 
themselves.  The  division  of  west-bound  traffic  was  ar¬ 
ranged  in  1877.  The  east-bound  pooling  arrangements 
were  more  complicated,  owing  to  the  number  of  initial 
points  of  shipment ;  and  it  was  two  years  before  they 
could  arrange  any  division  at  all.  Meantime,  an  associa- 

1  The  Anthracite  Coal  Combination  was  the  earliest  instance.  It  was 
undertaken  by  the  roads  as  mine-owners  rather  than  as  carriers.  It  was 

strongest  in  the  years  1872-76.  It  aimed  to  limit  production,  not  merely  to 
divide  it.  The  combination  owned  about  75  per  cent,  of  the  anthracite  coal 
fields.  Its  measures  against  independent  mine-owners  were  extremely  op¬ 
pressive.  For  dates  etc.,  see  Int.  Com.  Rep.,  1879,  PP*  179-182. 

3  Hepburn  Com.  Test.  (Blanchard),  pp.  3315  ff.  Int.  Com.  Rep.,  1879,  p. 
177.  The  Standard  Oil  Co.  was  the  worst  instance.  The  system  of  cattle  even¬ 
ers  was  as  bad  in  principle,  but  was  never  carried  out  with  the  same  power. 


96 


RAILROAD  TRANSPORTATION. 


tion,  something  like  that  of  the  southern  roads,  had  been 
formed  by  the  trunk  lines  and  their  connections,  under  the 
title  of  the  Joint  Executive  Committee.  Albert  Fink  was 
at  its  head.  It  never  attained  the  thoroughness  of  or¬ 
ganization  which  there  has  been  in  the  South.  There  was 
no  clearing-house  system,  and  no  means  of  forming  pool¬ 
ing  contracts  by  any  central  authority — only  by  the  volun¬ 
tary  action  of  the  roads  in  each  individual  case.1  We 
thus  had  three  distinct  sets  of  arrangements.  I.  As  to 
differentials  between  cities.  2.  As  to  percentages  of 
traffic  between  trunk-lines.  3.  As  to  general  business  ar¬ 
rangements,  rates,  etc.,  under  the  Joint  Executive  Com¬ 
mittee. 

One  result  of  this  settlement  was  an  increase  of  traffic 
by  water.  The  business  of  the  Mississippi  River,  stimu¬ 
lated  as  it  was  by  the  construction  of  the  jetties  at  its 
mouth,  grew  enormously.2  Even  the  traffic  of  the  Erie 
Canal  revived  for  the  time  being.  The  advantage  during 
these  years  was  in  favor  of  New  York  as  compared  with 
Baltimore,  or  as  compared  with  any  other  port  except 
New  Orleans.  But  the  people  of  New  York  were  not  satis¬ 
fied.  They  were  displeased  at  what  seemed  to  increase 
the  arbitrary  power  of  the  railroads  ;  and  the  result  of 
their  dissatisfaction  was  the  appointment  of  a  Committee 
of  the  New  York  Assembly — commonly  known  as  the 
Hepburn  Committee — “  to  investigate  alleged  abuses  in 
railroad  management.”  They  brought  to  light  abuses 
enough  ;  but  the  general  drift  of  the  evidence  showed  un¬ 
mistakably  that  the  pooling  system,  under  the  administra- 

1  Hepburn  Com.  Testimony,  pp.  3120  ff.  (Blanchard). 

Fink  :  “  The  Railroad  Problem  and  its  Solution,”  18S0. 

2  Internal  Commerce  Report,  1881,  pp.  48  ff.  The  exports  of  grain  and 
flour  at  New  Orleans  increased  from  less  than  one  million  bushels  in  1875  to 
over  twelve  million  in  18S0. 


COMPETITION  AND  COMBINATION.  9 7 

tion  of  Mr.  Fink,  had  lessened  rather  than  increased  those 
abuses.1 

Still  the  New  York  merchants  believed  that  the  exist¬ 
ing  arrangements  as  to  differential  rates  did  not  do  them 
justice  ;  and  the  railroads  leading  to  New  York  appear  to 
have  shared  this  belief.  At  any  rate,  the  agreement  was 
terminated  in  the  year  1881,  by  action  of  the  New  York 
Central 2 ;  and  a  fierce  railroad  war  raged  for  eight  months 
afterward.  It  did  not  involve  as  great  a  reduction  of  divi¬ 
dends  as  has  sometimes  been  the  case,  because  general 
business  was  prosperous  and  prices  were  high  ;  but  the  re¬ 
duction  in  rates  was  very  great.  The  railroad  organiza¬ 
tion  was  quite  powerless  to  stop  this  fight.  An  effort  was 
made  to  have  recourse  to  arbitration  ;  and  Messrs.  Thur¬ 
man,  Washburne,  and  Cooley  were  appointed  an  advisory 
committee  on  the  subject.  Their  report  was  interesting, 
but  it  settled  nothing.  They  showed  clearly  enough  how 
Baltimore  claimed  that  rates  ought  to  be  based  on  dis¬ 
tance,  while  New  York  based  her  claims  for  equality  on  the 
advantage  of  the  New  York  Central  in  matter  of  grades. 
The  committee  showed  the  fallacy  of  some  of  these  points, 
but  they  could  not  show  any  principle  on  which  the  matter 
should  be  decided.3  Meantime  Mr.  Fink  had  been  study¬ 
ing  the  subject,  with  more  definite  results.  If  he  did  not 
solve  the  question,  he  at  any  rate  did  a  great  deal  toward 
clearing  it  up.4  He  showed  that  the  violence  of  the  com- 


1  This  is  candidly  admitted  by  Simon  Sterne  himself,  although  he  was  pro¬ 
fessionally  employed  by  the  complainants  before  the  committee. 

a  Fink  :  “  Report  on  Adjustment  of  R.  R.  Transp.  Rates,”  1882,  pp.  6,  7. 

8  Report  of  Messrs.  Thurman,  Washburne,  and  Cooley,  an  Advisory  Com¬ 
mission  on  Differential  Rates,  etc.  N.  Y.,  1882. 

4  The  “  Report  on  the  Adjustment  of  Transportation  Rates  to  the  Sea¬ 
board,”  already  cited,  is  one  of  the  most  successful  applications  ever  made  of 
mathematical  methods  to  social  phenomena.  It  ought  to  give  Mr.  Fink  as 


98 


RAILROAD  TRANSPORTATION. 


petition  between  the  seaboard  cities,  was  due  to  the  fact 
that  they  were  simply  intermediate  points  on  the  route 
between  Chicago  and  Liverpool,  or  some  other  European 
port.  Of  this  whole  route  the  railroad  formed  one  part, 
the  water  route  across  the  Atlantic  the  other.  He  further 
showed  how  ocean  rates  adapted  themselves  to  rail  rates, 
so  that  the  rate  Chicago — New  York  plus  New  York — Liv¬ 
erpool  was  almost  exactly  equal  to  the  rate  Chicago — Balti¬ 
more  plus  Baltimore — Liverpool.* 1 2  This  being  the  case,  the 
amount  of  traffic  at  each  port  was  regulated  by  the  harbor 
and  warehouse  facilities  in  each  case ;  and  as  long  as  the 
differentials  were  not  grossly  unfair,  matters  would  adjust 
themselves.3 

Matters  finally  settled  back  on  the  same  general  arrange¬ 
ment  as  before.  But  one  thing  became  clear.  The  water 
routes  could  not  compete  with  the  railroads  at  the  rail¬ 
roads’  war  rates.  The  railroad  war  of  1881-2  had  checked 
the  development  of  Mississippi  River  traffic,  and  had  rapidly 
cut  into  that  of  the  Erie  Canal.  The  complete  abolition  of 
tolls  on  the  latter  was  almost  a  matter  of  necessity  ;  and, 
when  it  came,  it  did  not  suffice  to  protect  the  canal  » 
business  in  the  face  of  a  renewed  railroad  war. 

For  the  peace  of  1882  was  of  shorter  duration  than  its 
predecessor;  and  the  war  which  began  in  1884  was,  in 
many  respects,  a  more  serious  one.  It  was  no  longer  a 

high  a  rank  among  scientific  investigators,  as  he  holds  among  practical  men. 
Unfortunately,  it  is  so  abstruse  that  very  few  people  take  the  time  to  do  it 
justice. 

1  If  the  goods  transported  by  the  Central  or  Erie  alone  were  considered, 
New  York  suffers  a  very  slight  disadvantage  as  compared  with  Baltimore.  But 
if  we  take  into  account  the  canal  rates,  New  York  has  a  slight  advantage. 

2  The  legitimate  inference  from  Fink’s  arguments  is,  that  the  differential 
rate  ought  exactly  to  counterbalance  the  difference  in  cost  of  ocean  carriage, 

if  things  are  to  be  adjusted  on  a  theoretically  correct  basis  ;  but  that,  practi¬ 
cally,  things  will  quickly  adjust  themselves  to  any  basis  whatever. 


COMPETITION  AND  COMBINATION 


99 


conflict  between  cities,  but  between  railroads — and  an 
aggravated  one  at  that,  because  some  of  the  roads  had 
been  built  for  speculative  purposes.  In  some  respects  it 
was  a  repetition  of  the  events  of  ten  years  before  ;  only 
now  the  West  Shore,  the  Lackawanna,  and  the  Chesa¬ 
peake  and  Ohio  had  taken  the  place  occupied  ten  years 
before  by  the  Grand  Trunk,  the  Erie,  and  the  Baltimore 
and  Ohio.  It  is  too  early  [July  i,  1885]  to  predict  the 
outcome  of  the  existing  war.  But  it  is  a  mere  truism  to 
say  that  it  must  end  in  combination  in  some  form.  It  is 
all  very  well  to  talk  of  free  competition  and  survival  of  the 
fittest.  But  permanent  competition  is  virtually  out  of  the 
question.  And  survival  of  the  fittest  is  only  possible 
when  the  unfittest  can  be  physically  removed — a  thing 
which  is  impossible  in  the  case  of  an  unfit  trunk  line. 
The  lion  and  the  lamb  must  lie  down  together.  The 
only  questions  are,  first,  how  long  before  this  state  of 
things  is  to  come  about  ;  and  second,  whether  the  lion  is 
to  lie  down  outside  of  the  lamb.1 


1  As  we  go  to  press  these  questions  seem  to  be  rapidly  settling  themselves., 


CHAPTER  VI. 


RAILROAD  CHARGES  AND  DISCRIMINATIONS. 

Profits  of  railroads  in  the  United  States — General  scale  of  freight  charges — 
Reduction  in  the  past  fifteen  years — Effect  of  steel  rails — Improvements 
in  railroad  economy — Back -loading — How  discrimination  arises — Charg¬ 
ing  what  the  traffic  will  bear — Different  views  regarding  the  system — 
Classification — Local  discriminations — Cases  where  they  are  a  necessary 
evil — Personal  discrimination — Evil  results  of  the  system — Short-sighted 
policy  on  the  part  of  certain  railroads — Effect  of  the  financial  condition 
of  different  companies — General  conclusions. 

Edward  Atkinson  :  “  The  Railway,  the  Farmer,  and  the  Public.”  Issued 
in  book  form  in  “The  Distribution  of  Products,”  New  York,  1885,-  pp. 
229-303. 

E.  Lavoinne  and  E.  Pontzen :  “  Les  Chemins  de  Fer  en  Amerique,” 
Paris,  1882  ;  vol.  ii. ,  pp.  334-382. 

See  also  references  at  the  beginning  of  the  preceding  chapter,  especially 
the  Hepburn  Committee  Report  and  Testimony. 

The  number  of  pamphlets  on  the  subject  is  enormous.  The  works  of 
Albert  Fink  on  the  one  hand,  and  of  Simon  Sterne  on  the  other,  are  good 
representatives  of  the  intelligent  argument  on  either  side.  In  some  respects 
the  best  thing  which  has  been  written  on  the  subject  is  by  E.  P.  Vining: 
“  The  Necessity  for  a  Classification  of  Freight,  and  the  Principles  on  Which 
it  is  Based,”  which  originally  appeared  in  the  Railway  Review  (Chicago), 
Oct.  18,  1884. 

For  works  regarding  European  practice  and  principles,  see  chap.  xiii. 

The  average  man  troubles  himself  very  little  about  the 
speculative  management  of  corporations,  or  about  their 
character  as  industrial  monopolies.  What  he  wants  to 
know  is  whether  they  are  charging  him  too  high  a  price 
for  their  services.  Nine  tenths  of  the  complaint  and  of 
the  proposed  legislation  deals  with  this  point.  Some  say 


100 


RAILROAD  CHARGES  AND  DISCRIMINATIONS.  IOI 


that  corporations  are  making  too  much  money.  Others 
say  that  their  charges  in  general  are  too  high.  A  still 
more  frequent  ground  of  complaint  is  that  the  charges 
are  irregular,  and  involve  discrimination — that  is,  that 
some  charges  are  made  higher  than  others  without  any 
good  reason  for  the  difference,  and  that  such  discrimi¬ 
nation  is  ruinous  to  the  less  favored  customers,  and  dan¬ 
gerous,  to  the  interests  of  the  public. 

The  first  two  complaints,  of  high  profits  and  high 
charges,  are  generally  false.  The  third,  concerning  dis¬ 
crimination,  is,  unfortunately,  true. 

I. — The  statement  that  corporations  make  too  much 
money  is  scarcely  borne  out  by  the  facts.  The  average  re¬ 
turn  of  the  railroads  in  this  country  is  under  four  per 
cent.,  the  bondholders  receiving  an  average-of  four  and  a 
half  per  cent.,  the  stockholders  of  two  and  a  half  per 
cent.  True,  much  of  the  stock  is  “  water,”  not  represent¬ 
ing  any  capital  actually  expended  ;  but  even  making  allow¬ 
ance  for  this,  it  is  hardly  probable  that  the  roads  are 
earning  more  than  five  per  cent,  on  the  total  investment. 
This  assumes  an  average  cost  of  $45,000  per  mile,  imply¬ 
ing  that  about  half  the  stock  and  one  sixth  of  the  bonds 
are  “  water.”  Some  authorities 1  of  deservedly  high  repute 
place  the  true  cost  lower;  but  their  methods  are  not  above 
criticism. 

1  For  instance.  Poor  (“  Manual  of  Railroads  of  the  United  States,”  18S4) 
is  disposed  to  take  the  position  that  about  half  of  the  nominal  capital  is 
water.  The  whole  question  is  an  extremely  difficult  one.  There  are  three 
ways  of  estimating  the  probable  cost  of  a  railroad.  The  first  is  to  take  the 
account  of  stock  and  debt,  and  make  deductions  for  amount  not  paid  in  cash. 
The  second  is  to  estimate  directly  the  probable  cost  of  duplication  of  such 
road.  The  third  is  to  take  another  road  as  nearly  like  it  as  possible,  which 
is  admitted  to  have  been  honestly  managed,  and  see  what  has  been  the  cost 
in  that  case.  This  is  by  far  the  best  method,  where  we  can  apply  it.  The 
two  first  methods  give  results  much  too  small :  the  first,  because  we  can  rarely 


102 


RAILROAD  TRANSPORTATION. 


But  it  is  objected  that,  even  if  the  average  profit  below, 
the  profit  of  certain  concerns  is  extremely  high.  Granted. 
But  so  it  is  in  other  lines  of  business,  and  so  it  must  be  in 
any  business.  If  there  is  much  risk  of  complete  failure, 
there  must  be  chance  of  large  gain  to  offset  it.  The  effort 
to  prevent  exorbitant  profits,  by  limiting  the  amount 
which  a  company  may  divide  among  its  stockholders,  is 
of  little  use.  It  is  generally  evaded  by  “  stock-watering  ” 
— that  is,  by  a  distribution  among  the  stockholders  of 
new  stock,  which  costs  them  little  or  nothing,  and  on 
which  they  can  receive  dividends.  But  even  if  the  law  is 
obeyed,  and  there  is  no  attempt  at  stock-watering,  the 
public  rarely  gains  any  advantage  from  it.  If  a  company 
is  not  allowed  to  divide  its  whole  net  income,  the  man¬ 
agers  will  not  reduce  rates.  They  will  find  it  easier  to  in¬ 
crease  expenses.  Or  they  may  choose  to  do  a  small 
business  at  high  rates,  instead  of  a  large  business  at 
moderate  rates.  To  forbid  a  corporation  to  increase  its 
profits  is  to  encourage  waste  and  discourage  enterprise. 
The  principle  of  limitation  of  dividend,  though  fondly 
clung  to  by  many  of  our  legislators,  cannot  be  considered 

make  allowance  for  earnings  which  have  been  spent  in  construction ;  the 
second,  because  it  takes  no  proper  account  of  “incidentals,”  an  enormous 
item  of  expense  in  any  large  undertaking.  It  is  often  said,  on  the  basis  of 
the  first  or  second  of  these  methods,  that  any  thing  above  $30,000  per  mile 
for  the  United  States  is  water.  But  if  we  try  to  make  any  comparison  with 
other  countries,  we  shall  find  these  figures  too  low.  The  only  country  whose 
railroads  have  cost  any  thing  like  as  low  a  figure  per  mile  is  Sweden  (see 
Appendix).  The  cost  there  is  given  at  $30,000.  But  the  Swedish  roads  are 
built  for  very  light  traffic  at  slow  rates  of  speed  ;  the  country  is  an  easy  one 
for  railroad  engineering  ;  land,  labor,  and  materials  are  all  exceedingly  cheap. 
It  is  not  fair  to  our  roads  to  make  this  the  standard  of  comparison. 

The  explanation  of  the  discrepancy  probably  is  that  it  'is  imposssible  to 
adapt  roads  in  advance  to  the  exact  use  which  is  afterward  made  of  them  ; 
and  that  the  changes  thus  rendered  necessary  form  an  item  of  incidental  ex¬ 
pense  so  universal  that  it  is  fair  to  reckon  it  as  part  of  the  cost. 


RAILROAD  CHARGES  AND  DISCRIMINA  T/ONS. 


103 


a  good  one.1  A  judiciously  arranged  tax  system  will 
answer  the  purpose  better. 

Where  there  is  not  a  natural  monopoly — that  is,  in  the 
vast  mass  of  cases — competition  will  generally  do  this 
part  of  the  work.  Where  the  profits  of  an  existing  con¬ 
cern  are  high  enough  to  tempt  it,  a  competitor  will  come 
into  the  field.  There  will  ultimately  be  combination,  and 
no  reduction  of  prices  ;  but  there  will  be  a  reduction  of 
profits,  and  a  large  one.  The  business  which  would  sup¬ 
port  one  concern  richly,  will  not  do  the  same  for  two,  no 
matter  how  much  they  combine,  or  what  rates  they  try  to 
make.2 

II. — If  railroad  profits  are  not  too  high,  the  charge  that 
railroad  prices  in  general  are  too  high  loses  all  its  plausi¬ 
bility. 

If  it  is  said  that  railroad  rates  in  general  are  too  high, 
any  one  of  three  things  may  be  meant :  either  that  the 
rates  give  too  high  a  profit ;  or  that  they  prevent  the  de¬ 
velopment  of  business  ;  or  that  they  are  higher  than  in 
other  countries.  The  first  of  these  points  we  have  already 
considered.  As  to  the  second  ; — nowhere  have  railroads 
done  so  much  to  develop  business  as  in  the  United  States, 
and  nowhere  has  the  actual  development  been  more  rapid. 
Mr.  Atkinson  3  has  shown  how  the  transportation  charges 
have  become  an  insignificant  element  in  the  price  of  prod¬ 
ucts.  The  cost  of  delivering  bread  from  the  baker  to  his 

1  See  pp.  55,  126.  T.  H.  Farrer  :  “  The  State  in  its  Relation  to  Trade,” 

pp.  88-90. 

3  It  is  fair  to  say  that  the  existence  of  roads  like  the  West  Shore  is  due  to 
the  effort  of  the  managers  of  the  Central  to  earn  dividends  on  watered  stock. 
But  it  is  not  fair  to  infer  that,  if  the  dividends  of  the  Central  had  been  lim¬ 
ited  by  law,  and  the  stock-watering  prevented,  the  policy  of  the  road  would 
have  been  so  changed  as  to  remove  the  inducements  to  build  a  parallel  line. 

*  “  The  Distribution  of  Products,”  pp.  292-295. 


104 


RAILROAD  TRANSPORTATION. 


customers  is  a  larger  element  in  the  price  of  bread  than 
the  cost  of  getting  wheat  from  the  farmer  to  the  miller, 
and  flour  from  the  miller  to  the  baker — though  the  one  is 
but  a  few  hundreds  of  yards,  and  the  other  as  many  hun¬ 
dreds  of  miles. 

As  to  the  comparison  with  other  countries : — Railroad 
charges  in  the  United  States  average  but  a  cent  and  a 
quarter  per  ton  per  mile.  In  1884  they  fell  to  a  cent  and 
one  eighth.  This  is  lower  than  they  are  anywhere  else  in 
the  world,1  and  lower  than  would  have  been  deemed  pos¬ 
sible  a  few  years  since.  It  is  hard  to  compare  our  present 
average  rates  with  those  of  fifteen  years  ago,  because  at 
that  time  no  general  statistics  were  collected.  But  it  is 
safe  to  say  that  they  have  been  reduced  50  per  cent, 
nominal,  or,  making  allowance  for  the  gold  premium  in 
1870,  35  per  cent,  actual.2  In  1870  the  average  rates  per 
ton  per  mile  on  the  roads  of  New  York  State  were  1.7  cts.; 
now  they  are  about  0.8  cts.  Then  the  average  rates  in 
Ohio  were  2.4  cts.;  now  they  are  less  than  0.9  cts.  In  the 
year  1869  the  earnings,  expenses,  and  profits  of  the  N.  Y. 
Central  per  ton  per  mile  were  2.4,  1.4,  1.0  cts.  respectively  ; 
for  the  last  five  years  they  have  averaged  about  0.8, 
0.6,  and  0.2  cts. 

Any  full  statement  of  the  means  by  which  this  reduc¬ 
tion  was  brought  about  would  belong  to  a  more  technical 
treatise  than  this  book  is  intended  to  be.  When  it  is  said 
that  it  was  due  to  competition,  it  is  in  a  certain  sense 
true  ;  only  it  requires  further  explanation  to  show  how 
the  whole  rate  now  should  be  so  much  less  than  the  mere 

1  This  is  only  true  of  freight  rates.  Our  average  passenger  charge  is 
2.35  cts.  per  mile,  while  that  of  most  European  countries  varies  from  1.3  to  2 
cts.  But  passenger  charges  are  a  much  less  important  matter  than  freight 
charges. 

a  “  The  Distribution  of  Products,”  pp.  240  fl. 


. 


RAILROAD  CHARGES  AND  DISCRIMINATIONS.  IC>5 

cost  a  few  years  ago.  The  reduction  in  cost  is  more  re¬ 
markable  than  the  reduction  in  rates.  A  part  of  this  re¬ 
duction  is  due  to  the  mere  growth  of  the  country,  offering 
a  larger  traffic,  and  enabling  the  railroad  to  utilize  its 
facilities  more  fully.  A  part  is  due  to  consolidation, 
whether  partial  or  complete,  by  which  connecting  roads 
have  been  enabled  to  administer  their  affairs  more  eco¬ 
nomically.  But  the  most  remarkable  part  of  the  change 
has  been  due  to  a  system  of  improved  methods  of  hand¬ 
ling  the  traffic  itself.1 

The  history  of  these  changes  begins  about  1867.  At 
that  time  matters  seemed  to  be  approaching  a  stationary 
state  as  far  as  any  reduction  in  railroad  charges  was  con¬ 
cerned.  Reductions  in  rates  are  usually  made  by  the  desire 
of  railroads  to  develop  business.  But  at  existing  rates, 
many  roads  then  had  little  inducement  to  develop  their 
business  very  much.  They  already  had  all  that  their  track 
would  carry.  Iron  rails  had  been  deteriorating  in  quality 
— under  heavy  traffic  they  required  constant  renewal  in 
order  to  avoid  the  most  serious  dangers  of  accident. 

It  was  at  this  juncture  that  Bessemer  steel  came  into 
use.  It  was  not  a  sudden  invention.  Bessemer  was  sim¬ 
ply  one  among  several  others  (Siemens,  Mushet,  Holley) 
who  steadily  improved  the  methods  of  producing  steel 
cheaply.3  The  result  of  the  employment  of  steel  was  little 
short  of  a  revolution  in  railroad  business  methods.  This 
was,  however,  an  indirect  result  rather  than  a  direct  one. 
This  fact  is  often  misunderstood.  At  the  worst  the  per- 

1  See  an  excellent  paper  by  Wm.  P.  Shinn,  in  U.  S.  Internal  Commerce 
Rep.,  1882,  Appendix,  pp.  294-305. 

a  The  result  of  their  labors  will  be  seen  by  the  following  table  : 


Price  of  rails  per  ton 

1868 

1872 

1876 

1880 

1884 

Bessemer  steel  . 

$158 

$112 

$59 

$67 

$31 

Iron 

79 

85 

4i 

49 

— 

IO 6  RAILROAD  TRANSPORTATION. 

centage  of  expense  due  to  repairs  of  iron  rails  was  6  </0. 
The  saving  in  cost  has  been  many  times  this  amount. 
What  the  introduction  of  steel  rails  did  was  to  give  the 
initial  impulse  in  this  movement.  It  made  itself  felt  in  a 
variety  of  ways. 

1.  The  laying  of  steel  rails  and  the  desire  to  use  them 
to  something  like  their  full  capacity  led  to  many  improve¬ 
ments  in  the  road-bed  itself.  These  resulted  in  great 
economy ;  but  they  would  hardly  have  been  made  under 
iron  rails,  because  it  would  not  [have  paid  to  develop  the 
road-bed  far  beyond  the  standard  of  quality  of  the  track. 

2.  They  found  that  the  steel  rails  would  bear  much 
heavier  loads  without  danger,  and  this  led  to  the  construc¬ 
tion  of  heavier  cars.  The  load  could  be  increased  in 
weight  faster  than  the  cars,  and  thus  the  “  paying  ”  weight 
constituted  a  larger  percentage  of  the  total  weight  hauled. 
Fifteen  years  ago,  the  normal  freight  car  weighed  18,000 
pounds,  and  carried  a  load  of  20,000.  It  was  found  that 
by  increasing  the  weight  of  the  car  to  21,000  it  could 
safely  carry  a  load  of  30,000;  and  a  further  increase 
of  weight  to  22,000  or  24,000  made  it  possible  to  carry  a 
load  of  40,000,  or  even  a  trifle  more.1  Of  the  total  weight 
of  a  loaded  freight  train  nearly  two  thirds  might  now  be 
paying  weight,  instead  of  only  one  half.2 

3.  Along  with  this  economy  of  load  they  secured  econ¬ 
omy  of  motive  power.  This  was  obtained  partly  by  an 
increase  in  the  size  of  locomotives,  which,  while  it  in- 

1  There  is  no  exact  standard  of  relation  between  weight  and  carrying 
capacity.  The  figures  in  the  text  are  taken  somewhat  at  random.  It  is  im¬ 
possible  to  tell  where  the  movement  will  end.  Cars  are  now  not  infrequently 
built  to  carry  50,000  pounds. 

2  These  figures  represent  possible  results  rather  than  actual  ones.  An 
average  car-load  of  ten  tons  represents  extremely  good  railroad  economy.  A 
ratio  of  50  %  paying  weight  both  ways  is  still  more  unusual. 


RAILROAD  CHARGES  AND  DISCRIMINATIONS .  \OJ 


creased  their  cost  of  building  and  running,  increased  their 
efficiency  still  faster ;  partly  by  increased  care  in  making 
up  trains,  so  that  the  existing  power  was  used  to  the  best 
advantage.  Hundreds  of  devices,  of  which  we  have  no 
room  to  speak  in  detail,  were  made  to  contribute  to  the 
desired  result. 

4.  But  what  contributed  more  than  all  else  to  the 
diminution  of  cost  was  that  they  adapted  the  business 
methods  of  the  roads  to  the  new  conditions  of  traffic. 
The  improvements  in  track  and  cars  had  increased  the 
capacity  for  doing  a  large  business,  at  the  same  time  that 
it  enabled  them  to  do  it  more  cheaply.  They  arranged 
their  rates  to  secure  this  business  and  to  utilize  their 
capacity  to  the  utmost.  One  of  the  most  effective  de¬ 
vices  in  this  matter  was  the  system  of  “  back-loading/’  To 
return  a  car  empty  is  a  great  waste  of  power.  In  some 
cases  it  is  a  necessity — cattle  cars  and  oil  cars,  for  instance, 
can,  as  a  rule,  carry  a  load  but  one  way.  In  those  cases 
the  rate  must  cover  the  cost  of  moving  the  cars  full  one 
way  and  empty  the  other,  before  the  rate  begins  to  be 
a  paying  one.  For  a  long  time  it  was  so  with  nearly 
all  cars  employed  in  the  carriage  of  grain.  Gradually 
our  railroad  managers  awoke  to  the  fact  that  for  obtain- 
ing  goods  to  fill  such  cars  any  rate  was  a  paying  rate, 
when  it  would  cover  the  difference  between  hauling  them 
empty  and  hauling  them  full — provided,  that  is,  that  such 
rates  developed  additional  business  which  could  be  ob¬ 
tained  on  no  other  terms. 

For  instance,  suppose  the  cost  of  loading  a  car  with 
wheat  at  St.  Louis  and  hauling  it  to  Philadelphia  was  $40, 
and  the  cost  of  getting  it  back  empty  was  $15.  To  give 
any  profit  the  rate  would  have  to  be  over  $55 — say  $60. 
The  company  sees  that  by  offering  a  $30  rate  it  can  fill  its 


108  RAILROAD  TRANSPORTATION. 

car  with  a  return  load  of  coal,  and  it  does  so.  What  is  the 
result?  In  the  former  instance  the  expenses  were  $40  -\- 
$15  =  $55;  the  receipts,  $60;  the  profit,  $5.  In  the 
latter  the  expenses  were  $40  +  $40  =  $80;  the  re- 
cepts,  $60  +  $30  =  $90;  the  profit,  $10.  Yet  the  aver¬ 
age  rate  which  secures  this  profit  of  $10  is  now  ($60  +  $30) 
-f-  2  =  $45.  An  increase  of  100  per  cent,  in  the  profits  of 
the  round  trip  has  been  accompanied  by  a  reduction  of 
25  per  cent,  in  the  average  rates  charged. 

This  is  an  extreme  case,  but  it  illustrates  one  of  the 
means  by  which  railroad  charges  have  been  so  much 
reduced  during  the  past  fifteen  years.  It  also  explains 
how  some  goods  can  be  profitably  carried  at  rates  which 
seem  utterly  unprofitable. 

III. — But  the  fact  that  the  charges  are  so  low  does  not 
make  differences  in  charge  bear  any  less  severely  upon  busi¬ 
ness.  A  difference  of  five  cents  per  bushel  in  the  charge 
for  transporting  wheat  a  thousand  miles  is  a  small  matter, 
taken  by  itself.  It  would  be  weeks  before  it  would  make 
a  difference  of  one  cent  to  the  individual  consumer  of 
bread.  But  if  a  railroad  makes  this  reduction  for  one 
miller,  and  not  for  another,  it  will  be  enough  to  drive  the 
latter  out  of  business.  Competition  is  carried  on  with 
such  a  narrow  margin  of  profit  that  the  railroad  has  it  in 
its  power  to  ruin  either  competitor.  The  fact  that  charges 
in  general  are  so  low  only  puts  men  more  completely 
at  the  mercy  of  the  railroad  authorities,  because  it  is 
impossible  to  find  any  other  means  of  transportation 
equally  good  and  cheap. 

A  difference  in  rates  not  based  upon  any  corresponding 
difference  in  cost,  constitutes  a  case  of  discrimination.1 


1  In  what  follows,  we  shall  confine  our  attention  to  discrimination  in 
freight  rates.  There  is  the  same  discrimination  in  the  passenger  business, 


RAILROAD  CHARGES  AND  DISCRIMINATIONS.  IO9 


Even  when  a  railroad  tariff  was  originally  based  on  dif¬ 
ferences  of  cost  of  service,  it  does  not  continue  so.  It 
never  remains  long  unchanged.  Every  day  special  circum¬ 
stances  arise  which  were  not  foreseen,  and  which  seem  to 
demand  a  change.  The  question  in  every  such  case  is : 
what  will  be  the  effect  of  the  change  ?  If  rates  are  re¬ 
duced  on  certain  lines  of  business,  gross  earnings  will  prob¬ 
ably  increase  on  account  of  increased  volume  of  business 
obtained.  But  will  net  earnings  increase  ?  That  is  to  say, 
will  gross  earnings  increase  faster  than  operating  ex¬ 
penses  ? 

This  is  the  real  question  ;  and  its  answer  involves  two 
elements.  One  is,  the  expense  of  hauling  each  additional 

but  it  is  not  so  much  felt  or  so  much  complained  of.  First,  the  business 
itself  is  less  important.  The  receipts  from  passengers  are  little  over  two- 
fifths  of  those  from  freight.  Second,  it  is  a  business  on  which  railroads  in 
general  make  very  little  money  at  best,  except  in  thickly  populated  dis¬ 
tricts.  That  being  the  case,  there  is  more  disposition  on  the  part  of  the 
public  to  allow  railroads  to  run  it  as  they  please.  They  carry  passengers  in 
order  to  attract  freight.  Every  now  and  then  they  amuse  themselves  by  a 
passenger-rate  war  ;  but  this  does  not  involve  either  the  same  loss  to  the 
railroads  or  the  same  disturbance  to  general  business  which  is  felt  in  a  war  of 
freight  rates. 

The  really  serious  form  of  passenger  discrimination  is  the  free-pass  sys¬ 
tem.  It  is  a  serious  thing,  not  so  much  on  account  of  the  money  involved, 
as  on  account  of  the  state  of  public  morals  which  it  indicates.  When 
passes  are  given  as  a  matter  of  mere  favoritism,  it  is  bad  enough.  When 
they  are  given  as  a  means  of  influencing  legislation,  it  is  far  worse.  Yet 
this  last  form  of  corruption  has  become  so  universal  that  people  cease  to  re¬ 
gard  it  as  corrupt.  Public  officials  and  other  men  of  influence  are  ready  to 
expect  and  claim  free  transportation  as  a  right.  To  all  intents  and  pur¬ 
poses  they  use  their  position  to  levy  blackmail  against  the  railroad  com¬ 
panies. 

The  question  should  be  kept  on  moral  grounds.  It  is  a  mistake  to  sup¬ 
pose  that  the  free-pass  system  makes  any  great  difference  with  passenger 
rates  in  general,  or  that  they  would  be  reduced  if  passes  were  abolished. 
They  would  probably  remain  the  same  as  before. 


IIO 


RAILROAD  TRANSPORTATION. 


car-load  ;  in  so  far,  rates  are  based  upon  cost  of  serviced 
The  other  is  the  increased  development  of  business  by 
lower  rates  ;  this  is  quite  independent  of  cost  of  service.1 2 

Suppose  that  the  expense  of  loading  and  hauling  each 
additional  car-load  of  wheat  from  A  to  B  is  $10.  Present 
rates  are  $15,  and  at  that  rate  the  road  obtains  1,000  car¬ 
loads  a  week — gross  earnings,  $15,000,  profit  above  opera¬ 
ting  expenses,  $5,000.  The  question  comes  up  whether 
they  shall  reduce  to  $13.  If  by  so  doing  they  can  double 
their  traffic  and  get  2,000  car-loads,  it  will  be  good  policy ; 
they  will  make  gross  earnings  $26,000  ;  expenses  $20,000  ; 
profit  $6,000.  If  it  only  increased  the  traffic  one  half  it 
would  be  bad  policy — giving  gross  earnings,  $19,500; 
operating  expenses,  $15,000  ;  profit,  $4,500.  But,  to  show 
how  cost  of  service  comes  in,  if  the  operating  expenses 
had  been  $12  per  car-load,  the  reduction  would  be  bad 
policy  in  both  cases  ;  while  if  they  were  only  $8  per  car¬ 
load  it  would  be  good  policy  in  both  cases. 

To  a  certain  extent  both  these  elements  have  acted  in 
combination  to  secure  the  great  permanent  reduction  in 
rates.3  But  in  each  particular  case  of  reduction,  cost  of  ser¬ 
vice  has  played  but  a  minor  part,  and  possibility  of  develop- 

1  An  analysis  of  the  elements  which  enter  into  cost  of  railroad  service  would 
carry  us  too  far  out  of  our  way.  The  chief  considerations  are  speed,  bulk, 
risk,  quantity,  and  regularity  of  shipment.  The  question  whether  a  return 
load  can  be  secured  is  also  of  great  importance.  For  more  detailed  analyses 
see  L.  E.  Morehouse:  “Cost  of  Transportation  on  Railroads,”  N.  Y.,  1874. 
A.  Fink  :  “Cost  of  R.  R.  Transportation  ”  (1874),  N.  Y.,  1882.  O.  Chan- 
ute :  “  Elements  of  Cost  of  R.  R.  Freight  Traffic,”  1874,  1885.  Jos.  Nim- 
mo,  Jr.  :  U.  S.  Internal  Com.  Rep,,  1876.  F.  B.  Herzog:  “The  Trans¬ 
portation  Question,”  New  York,  1883.  Kirkman  :  “  Railway  Expenditures,” 
I.,  291-327. 

a  See  Appendix,  for  a  more  exact  mathematical  statement  of  these  rela¬ 
tions. 

3  Hepburn  Com.  Test.,  p.  47  (joint  letter  of  Vanderbilt  and  Jewett). 
Vining  on  “  Classification  of  Freight.” 


RAILROAD  CHARGES  AND  DISCRIM1NA  TIONS.  1 1 1 


ing  traffic  has  been  the  main  question  considered.  Thus 
there  has  gradually  grown  up  a  system  of  rates  favor¬ 
ing  certain  classes  of  goods,  certain  localities,  or  certain 
individuals.  It  was  found  that  by  lowering  the  rates  for 
cheap  goods  a  large  traffic  was  developed.  It  was  found 
that  by  lowering  the  rates  at  competitive  points  a  large 
traffic  might  be  secured  which  would  otherwise  go  by 
other  routes.  It  was  found — or  at  any  rate,  it  appeared — 
that  by  lowering  rates  to  certain  individuals,  a  road  in¬ 
creased  its  returns  better  than  by  a  general  lowering  of 
rates. 

This  constitutes  the  system  of  charging  “  what  the  traffic 
will  bear.”  The  ordinary  objections  to  it  are  obvious  at 
once.  It  is  generally  believed  that  the  less-favored  ship¬ 
pers  are  taxed  in  order  that  the  railroad  may  do  business 
for  others  at  unreasonably  low  rates  1 ;  that  in  any  other 
business  the  loss  of  competition  would  prevent  such  abuses ; 
and  that  in  the  absence  of  any  effective  competition,  laws 
should  be  passed  forbidding  the  railroad  to  make  a  great 
deal  more  profit  on  one  part  of  its  business  than  it  does 
on  another.  This  is  the  aim  of  anti-discrimination  bills. 

On  the  other  side,  it  is  maintained  by  railroad  men  that 
this  idea  of  a  tax  is  not  warranted  ;  and  that  any  such  at¬ 
tempt  to  enforce  equality,  whether  between  classes,  locali¬ 
ties,  or  individuals,  will  diminish  the  profit  and  efficiency 
of  the  railroads,  and  not  bring  the  expected  advantage  to 
the  shippers,  still  less  to  the  general  public. 

The  effects  of  the  three  forms  of  discrimination — be¬ 
tween  classes  of  business,  localities,  or  individuals — must 
be  discussed  separately. 

1  Too  often,  especially  in  purely  legal  discussion,  this  is  assumed  without 
argument.  Compare  R.  P.  Harlow  :  “  Inter-State  Railroads  and  Their  Regu¬ 
lation  by  Congress  ”  (N.  Y.  Bar  Association  Prize  Essay,  1880),  p.  8. 


1 12 


RAILROAD  TRANSPORTATION. 


I.  Classification  of  business.  Railroads  divide  their 
freight  into  four  or  more  classes,  the  division  being  mainly 
based  on  the  value  of  the  goods.  Thus,  dry  goods  are 
placed  in  the  first  class,  and  lumber  in  the  fourth ;  and 
the  charges  on  the  former  are  made  two  or  three  times 
as  high  as  on  the  latter.  There  is  a  difference  of  cost  of 
handling,  and  of  risk  ;  but  nothing  like  as  great  as  the 
difference  in  charge.  The  railroad  does  not  base  its  classi¬ 
fication  upon  cost  of  service,  but  upon  what  the  traffic  will 
bear.  A  ton  of  lumber  has  so  little  value  that,  if  they 
attempted  to  charge  the  same  rates  for  it  which  they 
charge  for  the  dry  goods,  they  would  get  none  of  it  to 
carry ;  the  traffic  would  not  bear  the  higher  rate. 

A  great  deal  of  freight  of  small  value  is  carried  not 
merely  at  less  than  the  average  rates,  but  at  less  than  the 
average  cost ;  that  is,  at  rates  which,  if  applied  to  the 
whole  business  of  the  road,  would  not  pay  expenses. 
Many  people  assume  that  such  business  is  an  actual  loss  to 
the  road,  and  that  other  business  is  taxed  to  make  up  for 
it.  This  is  a  fallacy.  Any  rate  which  will  more  than 
cover  the  expense  of  moving  the  cars  and  handling  the 
goods  is  a  paying  rate,  provided  the  business  can  be  had  on 
no  other  terms'  If  it  is  a  question  of  filling  cars  that  must 
otherwise  be  returned  empty,  any  rate  which  more  than 
covers  the  mere  difference  in  expense  between  running 
them  full  and  running  them  empty,  is  a  paying  rate.1 2  If 
a  manager  should  reject  such  business  because  it  did  not 
pay  its  share  of  the  fixed  charges  (as  distinct  from  train 

1  Vining  :  “  Classification  of  Freight,”  etc. 

51  See  some  striking  figures  in  L.  E.  Morehouse  “  Concerning  the  Cost  of 
Transportation  on  Railroads,”  New  York,  1874,  p.  15.  These  figures  are 
better  arranged  for  our  present  purpose  than  are  the  more  comprehensive 
statistics  collected  by  Mr.  Octave  Chanute  (1874,  1885),  or  than  those  of 
Albert  Fink  in  his  report  on  “  Cost  of  R.  R.  Transportation,”  1874. 


RAILROAD  CHARGES  AND  DISCRIMINATIONS.  1 1 3 


expenses)  he  would  make  a  great  mistake.  He  would  re¬ 
duce  his  business,  and  leave  those  charges  the  same.  The 
fixed  charges  must  mainly  be  borne  by  the  lines  of  busi¬ 
ness  that  can  best  afford  to  pay  them — that  is,  by  the  valu¬ 
able  goods.1 

The  earliest  freight  tariffs  involved  little  or  no  classifica¬ 
tion.  Each  step  toward  our  present  system  has  been 
accompanied  by  increased  efficiency.  It  has  made  the 
cheap  traffic  possible,  and  has  helped  the  high-class  traffic 
more  than  it  has  hurt  it.  To  do  away  with  this  would  be 

1  Take  a  parallel  case  from  manufacturing  industry.  A  wire  manufac¬ 
turer  imports  the  rods  which  he  intends  to  draw  out  into  wire.  He  finds 
them  covered  with  rust.  As  the  first  step  in  his  process  he  washes  off  that 
iron  rust  with  sulphuric  acid.  The  washings  are  often  allowed  to  run  to 
waste.  But  if  a  manufacturer  will  put  up  the  necessary  sheds  for  collecting 
them  and  boiling  them  down,  he  can  obtain  a  quantity  of  crystallized  sul¬ 
phate  of  iron,  or  copperas.  The  commercial  value  of  this  copperas  is  very 
small.  It  is  probably  not  worth  as  much  as  the  acid  which  it  contains.  Cer¬ 
tainly  no  one  would  think  of  deliberately  dissolving  iron  in  sulphuric  acid, 
and  selling  the  copperas  thus  made.  But  the  wire  manufacturer  has  the 
material  on  his  hands  in  the  form  of  washings.  It  is  better  for  him  to  sell 
for  the  merest  trifle  rather  than  let  it  run  to  waste. 

Now  suppose  a  legislator  says  :  “  Here  is  this  man  making  arbitrary  dis¬ 
criminations.  He  has  the  only  wire  mill  in  the  region,  and  so  makes  a 
large  profit  on  his  wire,  while  he  allows  the  consumers  of  copperas  to  have 
it  at  prices  which  hardly  pay  expenses.  In  fact,  he  sells  it  at  a  less  sum 
than  the  materials  cost  him.  Let  us  enact  a  law  which  shall  prevent  him 
from  making  more  money  on  one  part  of  his  business  than  another.”  What 
would  be  the  result  of  such  a  law  ?  Would  he  reduce  his  price  on  wire  so  as 
to  make  no  more  profit  than  on  his  copperas  ?  Obviously  not.  Would  he 
reduce  his  prices  for  wire  and  raise  them  for  copperas  ?  No.  He  could  not 
sell  his  copperas  at  the  higher  prices,  or  he  would  have  charged  them  to 
begin  with.  The  only  result  will  be  that  he  will  stop  making  copperas. 
His  prices  for  wire  will  remain  the  same.  If  any  thing,  they  will  tend  to 
run  higher,  because  one  slight  source  of  advantage  is  cut  off,  so  that  com¬ 
petitors  are  not  so  likely  to  be  tempted  to  come  into  the  business.  It  would 
be  nonsense  for  the  man  who  buys  wire  to  say  that  he  is  “  taxed  ”  to  fur¬ 
nish  another  man  with  copperas  below  cost. 


1 14  RAILROAD  TRANSPORTATION. 

a  long  step  backward.  If  our  railroads  made  it  a  rule  to 
carry  nothing  at  less  than  the  average  cost  of  doing  the 
whole  business,  they  would  give  up  nearly  all  the  coal 
trade  and  a  great  deal  of  the  grain  trade.  It  would  give 
us  dear  food  and  dear  fuel,  and  would  injure  both  the 
railroads  and  the  districts  which  they  serve. 

2.  Local  discriminations.  Where  a  railroad  is  the  only 
means  of  conveyance,  it  can  charge  what  the  traffic  will 
bear,  without  restraint.  But  where  it  comes  into  com¬ 
petition  with  a  water-route,  or  with  another  railroad,  its 
charges  are  brought  down  to  the  lowest  possible  figure. 
The  points  where  there  is  no  competition  are  made  to  pay 
the  fixed  charges,  while  the  rates  for  competitive  business 
will  little  more  than  pay  train  and  station  expenses.  It  is 
better  to  have  business  on  those  terms  than  to  have  it  go 
by  the  rival  route.  In  a  railroad  war  this  competition  is 
carried  beyond  the  bounds  of  reason.  There  was  a  time 
when  cattle  were  carried  from  Chicago  to  New  York  at  one 
dollar  a  car-load,1  These  low  rates  develop  the  competi¬ 
tive  point  rapidly,  while  the  higher  rates  retard  the  growth 
of  the  places  where  there  is  no  such  competition.  When 
the  competition  is  simply  between  railroads,  a  pool  may 
do  away  with  these  local  differences  by  raising  rates  at  the 
competitive  point.  Where  one  place  has  the  benefit  of 
water  competition,  and  another  has  not,  it  is  hard  to 
devise  any  effective  means  of  getting  rid  of  the  differ¬ 
ences. 

We  are  apt  to  think  that  because  these  local  discrimina¬ 
tions  are  an  evil,  it  must  be  the  fault  of  somebody.  In 
our  anxiety  to  get  rid  of  the  evil,  we  are  apt  to  overlook 
the  natural  causes  which  led  to  it,  and  which  sometimes 
must  lead  to  it  almost  of  necessity.  That  local  discrimina- 


1  Hepburn  Com.  Test.  (Vanderbilt),  p.  1659. 


RAILROAD  CHARGES  AND  DISCRIMINA  TIONS .  1 1 5 


tions  are  a  most  serious  evil,  no  one  can  doubt.  That  they 
are  exaggerated,  and  in  many  instances  flagrantly  exagger¬ 
ated,  by  the  short-sighted  policy  of  the  railroad  managers, 
is  equally  certain.1  But  there  are  many  instances  where 
the  railroads  are  not  responsible  for  them,2  and  where  it  is 
worse  than  useless  to  try  to  prohibit  them  by  law.  We 
are  not  arguing  in  favor  of  this  system,  but  against  the 
popular  remedy — a  statute. 

Suppose  it  is  a  question  whether  a  road  can  be  built 
through  a  country  district,  lying  between  two  large  cities, 
which  have  the  benefit  of  water  communication,  while  the 
intervening  district  has  not.  The  rate  between  these 
points  must  be  made  low,  to  meet  water  competition  ;  so 
low,  that  if  it  were  applied  to  the  whole  business  of  the 
road  it  would  make  it  quite  unprofitable.  On  the  other 
hand  the  local  business  at  intermediate  points  is  so  small 
that  this  alone  cannot  support  the  road,  no  matter  how  low 
or  how  high  the  rates  are  made.  In  other  words,  in  order 
to  live  at  all,  the  road  must  secure  two  different  things — 
the  high  rates  for  its  local  traffic,  and  the  large  traffic  of 
the  through  points  which  can  only  be  attracted  by  low 
rates.  If  they. are  to  have  the  road,  they  must  have  dis¬ 
crimination.3 * * * * 8 

1  Hepburn  Com.  Exhibits,  p.  313.  Joint  letter  of  Vanderbilt  and  Jewett, 

Testimony,  p.  56.  Argument  of  John  Norris  before  Penna.  Senate  Judi¬ 

ciary  Com.,  Apr.  9,  1885.  The  general  management  of  a  railroad  rarely 

appreciates  local  needs  at  their  full  importance.  The  plan  of  having  advisory 
boards  to  represent  such  interests  has  frequently  been  suggested.  The  plan 
has  been  carried  out  in  some  parts  of  Europe.  Mr.  H.  S.  Haines  has  shown 

strong  reasons  for  trying  it  in  America. 

a  E.  P.  Alexander :  “  Reply  to  Questions  of  the  N.  Y.  Chamber  of  Com¬ 

merce.”  p.  7. 

8  Or  else  give  a  subsidy.  The  evils  of  this  alternative  have  been  very  clearly 
seen  in  American  railroad  history.  Of  course  this  reasoning  does  not  apply 
to  roads  which  are  earning  high  profits.  But  it  is  almost  impossible  to  pass 
a  law  which  shall  apply  to  profitable  roads,  and  exempt  unprofitable  ones. 


1 16  RAILROAD  TRANSPORTATION. 

This  point  is  so  important  and  at  the  same  time  so  hard 
to  grasp,1  that  it  is  worth  while  to  take  a  detailed  illustra¬ 
tion.  On  the  coast  of  Delaware,  a  few  years  ago,  there 
was  a  place  which  we  shall  call  X,  well  suited  for  oyster¬ 
growing,  but  which  sent  very  few  oysters  to  market,  be¬ 
cause  the  railroad  rates  were  so  high  as  to  leave  no  margin 
of  profit.  The  local  oyster-growers  represented  to  the 
railroad  that  if  the  rates  were  brought  down  to  one  dollar 
per  hundred  pounds,  the  business  would  become  profitable 
and  the  railroad  could  be  sure  of  regular  shipments  at  that 
price.  The  railroad  men  looked  into  the  matter.  They 
found  that  the  price  of  oysters  in  the  Philadelphia  market 
was  such  that  the  local  oystermen  could  pay  $i  per  hun¬ 
dred  pounds  to  the  railroad  and  still  have  a  fair  profit  left. 
If  the  road  tried  to  charge  more,  it  would  so  cut  down  the 
profit  as  to  leave  men  no  inducement  to  enter  the  busi¬ 
ness.  That  is,  those  oysters  would  bear  a  rate  of  $i  per 
hundred,  and  no  more.  Further,  the  railroad  men  found 
that  if  they  could  get  every  day  a  car-load,  or  nearly  a  car 
load,  at  this  rate,  it  would  more  than  cover  the  expense 
of  hauling  an  extra  car  by  quick  train  back  and  forth 
every  day,  with  the  incidental  expenses  of  interest  and  re¬ 
pairs.  So  they  put  the  car  on,  and  were  disappointed  to 
find  that  the  local  oyster-growers  could  only  furnish 
oysters  enough  to  fill  the  car  about  half  full.  The  expense 
to  the  road  of  running  it  half  full  was  almost  as  great  as 
of  running  it  full ;  the  income  was  reduced  one  half. 
They  could  not  make  up  by  raising  the  rates,  for  these 
were  as  high  as  the  traffic  would  bear.  They  could  not 
increase  their  business  much  by  lowering  rates.  The 
difficulty  was  not  with  the  price  charged,  but  with  the 

1  So  able  a  critic  as  Dr.  v.  d.  Leyen  quite  fails  to  appreciate  its  force. 
(“  Die  nordamerikanischen  Eisenbahnen,”  Leipzig,  1SS5.) 


RAILROAD  CHARGES  AND  DISCRIMINATIONS.  1 17 

capacity  of  the  local  business.  It  seemed  as  if  this  special 
service  must  be  abandoned. 

One  possibility  suggested  itself.  At  some  distance  be¬ 
yond  X,  the  terminus  of  this  railroad,  was  another  oyster¬ 
growing  place,  Y,  which  sent  its  oysters  to  market  by 
another  route.  The  supply  at  Y  was  very  much  greater 
than  at  X.  The  people  at  Y  were  paying  a  dollar  a  hun¬ 
dred  to  send  their  oysters  to  market.  It  would  hardly 
cost  twenty-five  cents  to  send  them  from  Y  to  X.  If, 
then,  the  railroad  from  X  to  Philadelphia  charged  but 
seventy-five  cents  a  hundred  on  oysters  which  came  from 
Y,  it  could  easily  fill  its  car  full.  This  was  what  they  did.  * 
They  then  had  half  a  car-load  of  oysters  grown  at  X,  on 
which  they  charged  a  dollar,  and  half  a  car-load  from  Y  on 
which  they  charged  seventy-five  cents  for  exactly  the  same 
service. 

Of  course  their  was  a  grand  outcry  at  X.  Their  trade 
was  discriminated  against  in  the  worst  possible  way — so 
they  said, — and  they  complained  to  the  railroad.  But  the 
railroad  men  fell  back  on  the  logic  of  facts.  The  points 
were  as  follows:  1.  A  whole  car-load  at  seventy-five  cents 
would  not  pay  expenses  of  handling  and  moving.  2.  At 
higher  rates  than  seventy-five  cents  they  could  not  get  a 
whole  car-load,  but  only  half  a  car-load ;  and  half  a  car¬ 
load  at  a  dollar  rate  (the  highest  charge  the  article  would 
bear)  would  not  pay  expenses.  Therefore,  3.  On  any  uni¬ 
form  rate  for  everybody,  the  road  must  lose  money,  and, 
4.  They  would  either  be  compelled  to  take  the  oyster  car 
away  altogether,  or  else  get  what  they  could  at  a  dollar, 
and  fill  up  at  seventy-five  cents.  There  was  no  escape 
from  this  reasoning  ;  and  the  oystermen  of  X  chose  to 
pay  the  higher  rate  rather  than  lose  the  service  alto¬ 
gether. 


1 1 8 


RAILROAD  TRANSPORTATION. 


This  is  a  typical  case.  The  business  of  a  railroad  is  of 
two  kinds.  Some  of  its  business,  like  the  oysters  of  X, 
must  be  done  over  this  railroad  or  not  at  all.  Of  such 
business  it  is  sure,  even  at  rather  high  rates.  The  only 
limit  is  the  value  of  the  service  ;  the  excess  of  the  selling 
price  at  market  above  cost  of  production  at  X.  But  a 
railroad  may  also  do  business  like  that  of  the  oysters  from 
Y,  which  can  be  sent  to  market  by  other  routes.  To  do 
this  it  must  make  special  concessions  and  lower  rates. 

Now  many  of  the  railroad  expenses  are  the  same, 
whether  it  does  both  kinds  of  business  or  only  one.  Re¬ 
pairs,  salaries,  and  interest  charges  are  mostly  inde¬ 
pendent  of  the  volume  of  business  done.  These  must  be 
paid  somehow,  just  as  the  expense  of  the  oyster  car  must 
be  paid  somehow.  At  the  higher  rate  the  road  cannot 
get  sufficient  volume  of  business.  At  the  lower  rate  it 
cannot  get  sufficient  profit.  It  must  do  as  the  oyster  car 
did,  get  what  it  can  at  high  rates,  and  fill  up  at  the  lower 
ones.  If  you  prohibit  this  by  law  you  quickly  cut  away 
the  margin  of  profit.  And  if  by  so  doing  you  make  it  im¬ 
possible  to  run  the  road,  who  is  most  hurt?  Not  the 
oyster-growers  of  Y,  who  had  the  low  rates.  They  still 
have  the  other  route.  It  is  the  oyster-growers  of  X,  and 
men  in  like  situations,  who  now  cannot  do  business  at  all. 

There  is  one  difference.  The  oyster  car  will  be  taken 
off  as  soon  as  it  is  unprofitable.  The  bankrupt  road  may 
run  on  almost  indefinitely.  But  the  indirect  effect  is  the 
same.  Witness  the  history  of  Granger  legislation.1  The 
farmers  had  moved  so  far  west  that  they  were  wholly  de¬ 
pendent  upon  the  railroads.  Where  there  was  but  one  road 
it  charged  what  it  pleased.  Where  there  were  two,  they 
fought  for  the  traffic,  and  brought  rates  down  very  low.  A 


1  For  details  see  pp.  130-136. 


RAILROAD  CHARGES  AND  DISCRIMINATIONS.  H9 


distant  competing  point  paid  much  less  than  a  near  local 
one.  The  Potter  law  attempted  to  make  the  rates  per 
mile  for  local  points  nearly  the  same  as  they  had  been  for 
competing  points.  The  result  was  disastrous.  The  old 
roads  struggled  on  as  best  they  might,  losing  money  all 
the  time.  But  no  new  ones  were  built,  and  the  local 
points  could  not  get  the  service  they  needed.  They  suf¬ 
fered  severely  ;  and  after  two  years’  trial  the  law  was  re¬ 
pealed. 

3.  Far  worse  are  the  discriminations  made  between 
individuals.  The  system  of  carrying  under  special  con¬ 
tracts,  below  schedule  rates,  is  the  most  serious  evil  con¬ 
nected  with  our  present  methods  of  railroad  management. 
Trade  adjusts  itself  to  almost  any  system  of  classification, 
and  sometimes  even  to  local  discriminations.  But  where 
two  individuals,  under  like  circumstances,  receive  differ¬ 
ent  treatment,  no  such  adjustment  is  possible.1 2 * * * * * 

A  mere  “  allowance  for  quantity,”  if  granted  to  all  with¬ 
out  partiality,  hardly  comes  under  this  head.  If  a  man 
receives  a  reduced  rate  because  he  ships  in  large  quanti¬ 
ties,  or  at  stated  times,  there  is  good  ground  for  making  a 
certain  difference  in  his  favor.  But  such  allowances  are 
not  always  given  impartially  ;  they  are  frequently  kept 
secret,8  and  are  often  quite  unreasonably  large  in  amount. 

1  The  old  theory  that  a  rate  should  be  reasonable  in  itself,  and  that,  if 
that  is  the  case,  it  makes  no  difference  to  A  what  B  may  be  paying,  can  no 
longer  be  held.  The  chief  thing  which  A  has  a  right  to  demand  is  that  he 
should  not  be  unfairly  handicapped  in  competition  with  B.  Any  such  in¬ 
equality  is  a  real  grievance.  Hepburn  Com.  Test.  (Fink),  p.513. 

2  Hepburn  Com.  Rep.,  p.  48.  Even  where  the  railroads  themselves 

would  like  to  do  away  with  them  it  is  not  always  easy.  The  diversion  of 

freight  (by  pools)  from  one  line  to  another,  so  bitterly  complained  of  by 

shippers,  is  resorted  to  to  prevent  secret  rebates  or  drawbacks.  One  of  the 

worst  abuses  is  the  practice  of  “underweighing”;  where  full  rates  are 

charged,  but  the  shipper  is  allowed  to  send  more  goods  than  he  pays  for. 


120 


RAILROAD  TRANSPORTATION. 


If  the  object  of  a  special  rate  is  to  develop  business 
which  could  not  otherwise  exist,  it  may  possibly  be  justi¬ 
fiable.  Much  good  is  often  done  in  this  way.  But  there 
is  always  a  presumption  against  special  rates  of  this  kind. 
They  establish  one  shipper ;  but  they  handicap  others. 
The  good  they  do  is  seen  and  felt.  The  evil  they  do  is 
unseen,  and,  for  a  time,  unfelt.  This  makes  the  tempta¬ 
tion  to  grant  such  rates  all  the  more  insidious,  and  their 
actual  effects  all  the  more  dangerous. 

A  special  contract,  for  instance,  is  given  to  millers  at 
Niagara.  It  produces  new  business  at  that  point.  But 
if  it  discriminates  unfairly  against  the  millers  at  Rochester' 
or  Buffalo,  the  gain  of  business  at  one  place  is  made  up 
by  a  loss  at  the  other.  Not  a  direct  loss,  be  it  observed; 
the  mills  will  not  shut  down ;  but  the  natural  growth  of 
business  will  be  checked.  The  railroad  manager  sees  the  mill 
at  Niagara  with  its  new  traffic ;  he  does  not  see  how  he  may 
have  prevented  the  growth  of  the  old  traffic  at  Rochester. 

What  makes  matters  worse  is  that,  where  the  system  of 
granting  special  rates  becomes  deeply  rooted,  a  great 
many  are  given  without  any  principle  at  all,  through  the 
caprice  or  favoritism  of  the  railroad  companies  and  their 
agents.1  The  revelations  made  before  the  Hepburn  Com¬ 
mittee,2  as  to  the  practice  of  railroads  in  the  matter  of  se¬ 
cret  rates  were  simply  appalling.  The  fact  that  railroads 
had  responsibilities  to  the  public  seemed  to  be  completely 
lost  sight  of.  There  was,  in  many  instances,  scarcely  a  pre¬ 
tence  of  regular  charges.3  Everybody  received  favors  as 

1  This  is  the  most  indefensible  part  of  the  whole  system  of  railroad  man¬ 
agement.  It  is  characteristic  that  Bismarck,  who  always  chooses  his  fighting- 
ground  with  skill,  made  this  a  main  base  of  operations  in  his  contest  against 
private  railroad  policy  in  Prussia.  See  chap.  xiii. 

a  Hepburn  Com.  Rep.,  pp.  49  flf. 

8  Hepburn  Com,  Test.  (Goodman),  pp.  120  ff.  It  was  estimated  that 


RAILROAD  CHARGES  AND  DISCRIMINATIONS.  12 1 


a  matter  of  course*  1 2 ;  the  only  question  was  how  many 
such  favors  he  could  obtain. 

An  unfortunate  result  of  the  system  is  that  special  rates 
are  granted  to  the  very  persons  who  need  them  least. 
Any  concern  which  does  not  charge  fixed  prices — from 
the  largest  railroad  down  to  the  pettiest  shop, — gives 
lower  rates  to  two  quite  distinct  sets  of  people,  and  for 
two  quite  distinct  reasons.  Some  people  get  low  rates 
because  they  are  too  poor  to  pay  the  high  ones ;  others, 
because  they  are  too  shrewd  to  pay  the  high  ones.  The 
very  poor  man  perhaps  gets  the  low  rate,  because  he 
otherwise  cannot  buy  at  all ;  the  rich  man  gets  the  low 
rate,  because  he  can  go  somewhere  else,  and  his  large  cus¬ 
tom  is  worth  making  special  efforts  to  secure.  The  more 
justifiable  forms  of  discrimination  are  those  in  favor  of  the 
weak.  Classification,  giving  low  rates  to  low-priced  arti¬ 
cles  of  prime  necessity,  like  fuel,  lumber,  or  provisions, 
comes  under  this  head.  On  the  other  hand,  the  great 
majority  of  local  and  personal  discriminations  are  in  favor 
of  the  strong.3  As  such,  they  do  great  harm  to  the  com¬ 
munity  by  increasing  inequalities  of  power ;  and  in  the  end 
they  are  apt  to  do  harm  to  the  roads  themselves.  The 
Standard  Oil  Company  was  fostered  by  a  system  of  special 
rates  until  it  became  strong  enough  to  dictate  its  own  terms.3 

This  was  an  extreme  case ;  but  there  is  almost  always  a 

ninety  per  cent,  of  the  Syracuse  business  and  fifty  per  cent,  of  the  whole 
business  of  the  New  York  Central  Railroad  was  done  at  special  rates. 

1  Goodman,  Testimony,  p.  159.  “Question:  ‘Then  the  condition  of 
getting  the  special  rate  is  making  the  application?’  Answer  :  ‘Yes,  sir.’” 

2  The  more  plausible  arguments  in  favor  of  personal  discrimination  are 
made  by  selecting  special  instances,  where  they  were  given  in  favor  of  the 
weak.  For  the  distinction  between  justifiable  and  unjustifiable  rebates,  see 
E.  P.  Alexander  :  “  Reply  to  Questions  of  Cham,  of  Com.,”  p.  9. 

2  Hepburn  Con.  Rep.,  40-46.  Exhibits,  p.  182.  Testimony  (Rutter), 
p.  2,549.  See  references  in  previous  chapter. 


122 


RAILROAD  TRANSPORTATION. 


certain  opposition  between  the  present  and  future  inter¬ 
ests  of  a  railroad.  If  a  company’s  object  simply  is  to 
make  as  good  a  dividend  as  possible  for  the  current  year, 
that  object  is  best  obtained  by  squeezing  the  local  busi¬ 
ness  of  which  it  is  sure,  and  securing  competitive  business 
on  almost  any  terms,  however  low.  But  for  the  perma¬ 
nent  interests  of  the  road  this  is  bad  policy.  The  local 
business  may  bear  the  squeezing  for  a  year  or  two,  but  it 
will  gradually  die  under  the  effects.  Such  a  policy  de¬ 
stroys  a  road’s  best  customers,  and  strengthens  the  hands 
of  those  who  are  in  a  position  to  dictate  their  own  terms. 
A  special  rate  to  a  favored  customer  means  temporary 
gain.  To  make  the  low  rate  general  means  temporary 
loss.  Yet,  where  there  is  any  doubt  felt,  the  latter  policy 
is  almost  always  the  wise  one. 

In  so  far  as  stock-watering  makes  railroads  pursue  a 
short-sighted  policy,  it  tends  to  prevent  general  reductions 
of  charge.  It  is  only  in  this  indirect  way  that  it  has  very 
much  effect  upon  rates.1 *  Its  influence  in  this  matter  is 
very  much  exaggerated  in  the  popular  belief.  A  railroad, 
as  we  shall  see  when  we  come  to  consider  the  attempts  to 
base  rates  on  cost  of  service,3  does  not  take  its  fixed 
charges  into  account  in  making  its  rates;3  It  tries  to 

1  The  railroads  which  have  high  capitalization  on  the  whole  do  business 

at  lower  rates  than  the  cheaply  built  ones.  During  the  last  twenty  years, 
while  rates  have  been  falling  so  rapidly,  the  average  capital  account  of  rail¬ 
roads  per  mile  has  been  increasing.  The  railroad  men  often  try  to  make 
their  capital  correspond  to  their  profits  ;  but  they  do  not  try  to  make  their 
rates  correspond  to  their  capital. 

3  Chap.  xiii. 

8  This  is  putting  the  matter  pretty  strongly,  stronger  than  many  railroad 
men  would  be  willing  to  state  it.  But  if  the  statements  on  p.  no  be  correct, 
it  is  unquestionably  true.  See  joint  letter  of  Vanderbilt  and  Jewett,  pp. 
70  ff.  Testimony  (Rutter),  p.  414.  See,  also,  testimony  of  E.  D.  Worces¬ 
ter  before  the  United  States  Senate  Committee  on  Transportation  Routes  to 
the  Seaboard,  pp.  141  if. 


RAILROAD  CHARGES  AND  DISCRIMINATIONS .  1 23 


arrange  matters  so  that  on  each  class  of  business  it  shall 
make  as  much  money  as  it  can  above  operating  expenses. 
If  it  makes  a  mistake  in  one  place  it  is  so  much  loss  to 
the  stockholders.  It  is  not  a  thing  which  it  can  try  to 
make  up  at  some  other  place  ;  because,  by  supposition 
it  would  in  any  event  try  to  make  all  it  could  at 
that  other  place,  and  to  raise  rates  there  would  do  more 
harm  than  good.  To  make  the  most  at  all  points  put 
together,  it  tries  to  make  the  most  at  each  point. 

They  thus  try  to  get  all  they  can  above  operating 
expenses.1  If  their  fixed  charges  are  but  small,  it  leaves 
them  a  good  profit.  If  the  nominal  amount  of  stock  is 
small  they  can  pay  a  good  percentage  in  dividends.  If 
the  fixed  charges  are  large,  or  the  stock  watered,  the  profit 
or  the  percentage  will  not  seem  so  good.  But  if  they  at¬ 
tempt  to  raise  their  charges  (or  refuse  to  reduce  them)  on 
this  account,  the  general  effect  would  be  to  lower  profits 
rather  than  increase  them.  The  only  thing  is,  that  if  a 
company  is  trying  to  pay  a  dividend  which  it  has  not 
really  earned,  it  is  more  likely  to  pursue  a  short-sighted 
policy  in  regard  to  rates.2 

This  temptation  to  sacrifice  the  future  to  the  present 
is  felt  far  more  strongly  in  the  case  of  a  bankrupt  road. 
A  set  of  officials  who  are  straining  every  nerve  to  avoid  a 
change  of  management,  will  tax  heavily  the  traffic  which 
they  have,  and  tempt  new  business  by  discriminations  of 
every  kind.  The  present  to  them  is  every  thing;  the 
future,  nothing;  and  public  interests  of  necessity  suffer. 

The  principle  of  charging  what  the  traffic  will  bear, 

1  Railroad  profits  are  to  a  large  extent  of  the  nature  of  rent  rather  than 
interest.  They  represent  excess  of  market  value  above  operating  expenses. 

2  They  are  far  more  apt  to  manipulate  their  accounts  for  this  purpose,  or 
even  to  make  unwise  reductions  in  operating  expenses,  than  to  make  any 
changes  with  regard  to  rates. 


124 


RAILROAD  TRANSPORTATION. 


gives  the  railroads  a  dangerous  power,  and  one  which 
is  often  abused ;  a  power  against  which  competition 
furnishes  no  remedy.1 2  Yet  if  our  analysis  of  the  practice 
of  railroads  with  regard  to  freight  charges  be  correct,  and 
if  our  illustrations  mean  any  thing  at  all,  it  is  unquestion¬ 
ably  the  principle  which  enables  railroads  to  render  most 
efficient  service  to  the  community.  Still  clearer  is  it  that 
the  high  rates  are  not  to  be  regarded  as  a  tax  which  could 
be  removed  if  the  low  rates  were  abandoned.  When  we 
come  to  examine  the  practice  of  European  countries,3 
where  the  attempt  has  been  made  to  base  rates  upon 
cost  of  service,  we  shall  find  these  views  confirmed  ;  and 
we  shall  further  find  that  the  effort  to  prevent  discrimina¬ 
tion  as  a  system  results  in  levelling  up  rather  than  levelling 
down. 

Wherever  there  is  an  industrial  monopoly  of  any  kind, 
there  is  a  liability  to  discriminations.  They  have  become 
most  prominent  in  the  case  of  railroads,  because  the 
monopoly  of  railroads  has  been  in  some  respects  most 
complete,  their  activity  most  extensive,  and  the  investiga¬ 
tion  of  their  doings  most  searching;  in  short,  because 
the  railroad  has  attained  a  fuller  development  than  other 
forms  of  industrial  monopoly.  It  is  for  this  reason  that 
the  problem  of  government  control  of  corporations  cen¬ 
tres  in  the  question  of  government  control  of  railroads. 


1  The  abuses  are  never  so  severe  as  in  a  railroad  war. 

2  Chap.  xiii. 


CHAPTER  VII. 


RAILROAD  LEGISLATION  IN  THE  UNITED  STATES. 

Early  efforts — Railroad  taxation — Railroad  liability — Regulation  of  rates — 
Pro-rata  laws — Origin  and  history  of  the  Granger  movement — Its  results 
in  Illinois  ;  in  other  States — Railroad  regulation  in  the  South — The 
Massachusetts  commission — Causes  of  its  success — Results  achieved  in 
Iowa — Regulation  of  inter-state  commerce — Bills  now  before  Congress 
— The  short-haul  principle — Pools — Maximum  and  minimum  rates — 
Functions  of  a  national  commission. 

E.  Lavoinne  and  E.  Pontzen  :  “  Les  Chemins  de  Fer  en  Amerique," 
Paris,  1882,  ii.,  pp.  467-500. 

Adams  :  “  Railroads  and  Railroad  Questions,"  pp.  116-148. 

“  State  Railroad  Commissions,"  The  Railroad  Gazette ,  New  York,  1883. 

The  Report  of  the  Special  Committee  of  the  U.  S.  Senate  on  the  Regula¬ 
tion  of  Inter-State  Commerce  (1885),  with  the  accompanying  testimony,  will 
furnish  matter  of  great  importance  on  these  subjects. 

The  early  railroad  legislation  in  the  United  States  was 
devised  for  the  object  of  securing  railroad  construction. 
The  only  fear  was  that  railroads  would  not  be  built  as  fast 
as  they  were  needed.  Obstacles  to  railroad  enterprise  were 
removed  as  fast  as  possible.  General  railroad  laws  were 
passed 1  which  did  away  with  the  necessity  of  securing  any 
special  act  of  the  Legislature  and  made  it  possible  for  per¬ 
sons  with  the  requisite  capital — or  even  without  it — to 
build  railroads  wherever  they  chose.  This  negative  en¬ 
couragement  was  not  all.  Most  communities  were  only 
too  ready  to  give  positive  encouragement  in  the  form  of 

1  In  New  York  1848,  1850;  Illinois  1849  ;  Ohio  1854;  Michigan  1855  ; 
somewhat  later  in  most  of  the  other  States. 


126 


RAILROAD  TRANSPORTATION. 


subsidies.  The  results  of  this  policy  we  have  seen  in  a 
previous  chapter. 

During  this  period  very  few  people  were  far-sighted 
enough  to  foresee  the  abuses  of  railroad  power  as  they 
have  since  developed.  Some  feared  that  rates  would  be 
made  too  high,  and  strove  to  provide  against  it,  in  a  cum¬ 
brous  and  ineffective  way.  The  great  majority  of  those 
legislators  who  thought  about  the  matter  at  all,  simply 
feared  that  railroad  profits  would  be  too  high,  and  sought 
to  limit  the  amount  which  might  be  divided.1  This  has 
little  or  no  effect  in  protecting  the  shipper.  If  a  railroad 
is  earning  more  money  than  it  is  allowed  to  divide,  it 
is  much  easier  to  spend  the  surplus  in  extra  ornament  or 
extra  salaries,  than  to  reduce  rates.  Such  limitation  of 
dividend  may  sometimes  actually  prevent  reduction  of  rates 
by  taking  away  from  a  road  the  inducement  to  increase  its 
volume  of  business.  The  road  may  prefer  to  do  a  small 
business  at  high  rates,  rather  than  a  much  larger  one  at 
rates  somewhat  lower. 

The  early  attempts  at  railroad  taxation  were  equally  ill- 
judged.  There  was  a  combined  effort  to  tax  the  road  and 
equipment  by  local  assessment  like  any  other  real  estate, 
and  to  tax  the  securities  as  personal  property  in  the 
hands  of  the  holders.  The  difficulty  about  the  latter 
plan,  was  the  fact  that  such  securities  were  habitually 
concealed,  and  practically  paid  no  tax  at  all.  The  at¬ 
tempt  at  local  assessment  of  the  road  was  almost  equally 
unfortunate.  No  one  knew  on  what  basis  it  was  to  be  as¬ 
sessed.  Some  assessors  valued  it  as  trunk  line — i.  e.y  on 
the  basis  of  its  supposed  earning  power.  Others  valued  it 
as  cow  pasture — i.  e.y  on  the  basis  of  the  value  of  adjoin- 

1  Compare  pp.  102,  T03.  On  the  legal  aspects  of  State  Regulation  of  Cor¬ 
porate  Profits,  see  T.  M.  Cooley,  in  North  Amor.  Rev.,  Sept.  18S3. 


RAILROAD  LEGISLATION. 


127 


ing  land.  “  The  difference  in  the  assessment  of  the  New 
York  Central  and  Hudson  River  Railroad,  where  for  all  the 
purposes  that  the  road  can  be  used,  it  is  of  the  same  value 
to  the  company,  is  twenty-four  thousand  dollars  per  mile.”  1 
The  absurdity  of  this  system,  if  it  can  indeed  be  called  a 
system,  is  obvious  enough.  It  has  gradually  become  clear 
that  the  tax  must  be  derived  not  so  much  from  an  assess¬ 
ment  of  individual  pieces  of  property  on  the  one  hand,  or 
against  individual  holders  of  stock  on  the  other,  as  from  an 
assessment  of  the  property  as  a  whole.  The  best  method 
for  doing  this  is  not  yet  clear ;  there  is  a  growing  belief 
that  the  tax  valuation  should  be  based  on  earnings  or 
earning  capacity.2 

Equally  crude  were  the  early  attempts  to  enforce  rail¬ 
road  liability ;  whether  in  the  matter  of  accidents,  or  for 
the  performance  of  their  duties  as  carriers.  In  the  former 

1  N.  Y.  State  Assessors’  Report,  1873. 

a  R.  Foster  :  “  The  Taxation  of  the  Elevated  Railroads  in  the  City  of  New 
York,”  1883. 

In  the  majority  of  States  the  assessment  is  based  on  a  direct  valuation  of 
the  property,  either  made  by  the  State  assessors  in  the  first  instance,  or  made 
by  local  assessors,  and  then  perhaps  corrected  by  a  board  of  equalization. 
In  Massachusetts  and  two  or  three  other  States,  it  is  based  on  the  market 
value  of  the  stock  or  securities — i.  <?.,  on  net  earnings,  present  or  prospec¬ 
tive  ;  since  it  is  on  this  that  the  market  value  depends.  In  Michigan  and 
one  or  two  other  States,  the  tax  is  based  on  gross  earnings.  Real  estate  not 
used  for  railroad  purposes  is  everywhere  assessed  locally,  just  as  if  it  were  the 
property  of  an  individual  ;  and  an  attempt  is  often  made,  without  much 
success,  to  tax  stock  as  personal  property  in  the  hands  of  the  holders.  See 
the  Report  of  Messrs.  Adams,  Williams,  and  Oberly  (Committee  of  the 
Convention  of  State  Railroad  Commissioners)  on  Taxation  of  Railroads  and 
Railroad  Securities.  New  York,  1880. 

The  question,  what  constitutes  the  taxable  value  of  a  railroad  franchise, 
has  been  pretty  constantly  evaded.  But  a  clause  in  the  California  constitu¬ 
tion  has  rendered  it  necessary  for  the  United  States  courts  to  meet  the 
question  more  squarely  ;  and  a  similar  result  seems  likely  to  be  reached  in 
New  Jersey  in  the  questions  arising  under  the  tax  laws  of  1884. 


128 


RAILROAD  TRANSPORTATION. 


much  real  progress  has  been  made  ;  more  by  the  action  of 
the  railroads  themselves  than  by  any  scheme  of  legisla¬ 
tion.1  In  the  latter  the  progress  has  been  but  slight.  It 
is  astonishing  that  a  country  whose  business  is  so  far  car¬ 
ried  on  by  bills  of  lading  should  have  left  the  question  of 
responsibility  upon  bills  of  lading  at  such  loose  ends.  It 
is  still  more  astonishing  that  a  country  whose  business  is 
liable  to  be  interrupted  by  strikes  like  those  of  recent 
years  should  have  feared  to  fix  the  responsibility  for  these 
interruptions.2 3  Perhaps  it  is  because  the  question  of  rail- 

1  C.  F.  Adams,  Jr.  :  “Notes  on  Railroad  Accidents.”  New  York,  1879. 

Compare  T.  H.  Farrer  :  “The  State  in  its  Relation  to  Trade,”  London,  1883, 
pp.  141,  142.  The  travelling  public  is  now  pretty  well  protected  against 
accidents  ;  this  cannot  be  said  of  the  railroad  employees  themselves,  who  are 
subjected  to  a  great  deal  of  avoidable  danger,  and  find  it  very  hard  to  get 
damages  in  case  of  accident. 

3  Public  notice  was  first  attracted  to  these  questions  on  a  large  scale  in  the 
railroad  strikes  of  1877  ;  and  again  in  the  telegraph  strike  of  1883.  The 
double  question  was  involved,  first,  whether  the  railroads  could  evade  per¬ 
formance  of  a  work  of  public  necessity,  and,  second,  whether  the  strikers 
could  be  allowed  to  take  advantage  of  this  public  necessity  to  enforce  their 
demands  against  the  railroads.  It  is  impossible  to  answer  either  of  these 
questions  in  the  affirmative.  An  effort  to  give  an  affirmative  answer  to  the 
first  question  was  finally  rejected  by  the  courts  of  New  York  in  connection 
with  the  freight-handlers’  strike  of  1882.  (See  Rep.  of  Sp.  Com.  of  N.  Y. 
Board  of  Trade  and  Transp.  on  Railway  Freight  Grievances,  1883.)  Yet 
if  we  say  that  the  railroads  are  under  special  necessity,  and  at  the  same  time 
forbid  the  employees  to  take  advantage  of  it,  we  are  brought  into  difficulty 
at  once.  Carl  Schurz,  in  an  able  article  in  the  North  American  Review , 
February,  1884,  makes  this  a  ground  for  urging  that  arbitration  should  be 
employed  in  all  these  cases  as  a  matter  of  public  necessity  and  public  right. 

Each  year  brings  into  greater  prominence  the  necessity  of  a  spirit  of  com¬ 
mon  action  between  the  company  and  its  employees.  We  have  not  space  to 
enter  upon  the  various  means  adopted  with  this  end  in  view.  See  Charles 
Paine:  “Elements  of  Railroading,”  New  York,  1885,  chap.  xiii.  M.  M. 
Kirkman  :  “  Railway  Expenditures,”  Chicago,  1880,  chap.  viii.  It  is 

part  and  parcel  of  the  same  question  which  presses  itself  more  and  more 
forcibly  upon  all  business  men  as  the  organization  of  industry  becomes  more 


RAILROAD  LEGISLATION. 


I29 


road  regulation  has  centred  around  a  problem  more  press¬ 
ing,  and  in  some  respects  more  difficult  than  any  of  these 
—the  control  of  railroad  charges,  and  especially  of  railroad 
discriminations. 

The  first  attempts  to  control  railroad  charges  had  been 
as  crude  as  the  legislation  concerning  liability  or  taxation. 
The  courts  began  with  a  blind  reliance  on  free  competi¬ 
tion.  This  may  do  very  well  as  a  regulator  of  railroad 
profits;  as  a  regulator  of  rates  it  is  a  failure.  Yet  our 
courts  have  been  extremely  slow  to  see  that  it  is  a  failure  ; 
and  where  they  have  seen  it,  they  have  gone  to  another 
extreme  which  is  quite  as  bad.  They  have  in  these  latter 
cases  tried  to  base  rates  forcibly  upon  cost  of  service  ;  but 
this  has  been  done  with  so  little  understanding  of  the  rail¬ 
road  business  as  to  make  their  standards  either  useless  or 
impracticable. 

There  have  been  many  efforts  to  supplement  the  action 
of  the  courts  by  legislation.  The  earliest  laws  of  this 
kind  attempted  to  prescribe  maximum  rates  like  the  old- 
fashioned  tolls  on  roads  or  canals.  This  was  carried 
through  systematically  in  England.  There  have  been 
occasional  instances  in  America.* 1  But  in  general  even  the 
stricter  sort  of  American  laws  have  simply  prescribed  that 
charges  shall  be  based  upon  the  distance  without  actually 
prescribing  the  unit  of  charge.  This  is  known  as  a  pro-rata 
law  ;  rates  arranged  on  this  principle  are  termed  equal- 
mileage  rates. 

A  pro-rata  law,  in  its  crudest  form,  prescribes  that 
charges  shall  be  proportional  to  the  distance.  This  is 
obviously  unfair,  even  under  the  “  cost-of-service  ”  prin- 

and  more  complicated,  and  personal  contact  between  the  capitalist  and  work¬ 
man  ceases. 

1  The  most  important  instance  was  probably  the  provision  limiting  the 
passenger  fares  of  the  New  York  Central  to  two  cents  per  mile. 


130 


RAILROAD  TRANSPORTATION. 


ciple,  because  it  does  not  cost  a  railroad  any  thing  like 
twice  as  much  to  carry  goods  two  hundred  miles  as  to 
carry  them  one  hundred  miles.  Once  load  them  in  your 
cars,  and  the  mere  expense  of  hauling  is  comparatively 
small.  Seeing  this,  attempts  have  been  made  so  to  modify 
th z  pro-rata  bill  as  to  introduce  the  principle  that  the  rail¬ 
road  shall  not  make  more  profit  upon  one  set  of  shipments 
than  upon  another.  This  fails,  for  the  same  reason  that 
the  attempt  of  the  courts  to  base  rates  on  cost  of  service 
fails, — there  are  practical  difficulties  in  the  way  of  its 
enforcement.  Furthermore,  in  the  attempt  to  carry  out 
pro-rata  laws,  the  indirect  effect,  in  crippling  the  railroads 
and  frightening  away  capital,  has  often  been  so  bad  that 
the  laws  have  had  to  be  repealed,  or  remain,  for  the  most 
part,  unenforced.1 

Until  after  the  war,  the  efforts  at  legislation  of  this  kind 
were  scattered.  All  were  on  a  small  scale.  It  was  in  con¬ 
nection  with  the  Granger  movement 2  (1870-77)  that  this 
problem  first  assumed  its  true  importance.  While  the 
detailed  attempts  of  the  Grangers  in  large  measure  failed, 
this  general  result  was  accomplished,  that  people  realized 
the  national  importance  of  these  questions.  The  move¬ 
ment  thus  has  an  importance  quite  out  of  proportion  to 
the  results  achieved. 

Nowhere  had  the  policy  of  railroad  subsidies  been  more 

1  See  pp.  135,  136. 

2  An  adequate  history  of  the  Granger  movement  yet  remains  to  be  written. 
C.  F.  Adams’,  Jr., (“Railroads, ”  pp.  123-132;  North  Amer.  Rev.,  April,  1875) 
is  admirable  as  far  as  it  goes,  but  does  not  profess  to  go  into  details.  Compare 
W.  M.  Grosvenor,  Atlantic  Monthly ,  Nov.,  1873  ;  P.  F.  Kupka,  “  Verkehrs- 
mittel  in  den  Ver.  Staaten,”  pp.  290-297  ;  E.  W.  Martin,  “  History  of  the 
Grange  Movement,”  Chicago,  1874  ;  D.  C.  Cloud,  “  Monopolies  and  the 
People,”  Davenport,  1873.  The  two  works  last  cited  are  valuable  chiefly  as 
reflecting  the  state  of  feeling  in  the  communities  where  the  movement  was 
strongest. 


RAILROAD  LEGISLATION. 


131 

recklessly  carried  out  than  in  the  Upper  Mississippi  val¬ 
ley.  The  spirit  of  enterprise  at  the  close  of  the  war 
found  full  play  here.  There  was  no  lack  either  of  national 
land-grants  or  municipal  subscriptions.  Each  community 
wanted  railroads  at  any  price.  Each  railroad  offered 
glowing  inducements  to  settlers.  The  result  was  that 
railroads  and  settlers  both  moved  too  far  west ;  and  ran 
heavily  into  debt  to  do  it. 

In  the  years  1865-71,  five  hundred  million  dollars  had 
been  invested  in  Western  railroads.  These  roads  were 
dependent  upon  the  wheat  crop  for  their  revenue.  The 
price  of  wheat,  which  for  some  years  had  been  high,  was 
at  last  affected  by  the  extension  of  production  and  the 
change  of  conditions.  With  transportation  charges  at 
their  previous  figure,  the  farmers  could  no  longer  pay 
their  debts.  With  transportation  charges  reduced,  the 
railroads  could  not  pay  theirs.  There  was  a  loss  to  be 
divided,  instead  of  a  profit.  It  was  beyond  the  power  of 
any  law  to  divide  this  loss  in  such  a  way  as  to  give  a 
profit  to  both  parties.1  It  was  the  result  of  general  indus¬ 
trial  conditions. 

1  The  same  difficulty  exists  to-day,  and  renders  it  impossible  in  many  in¬ 
stances  to  make  rates  which  shall  be  reasonable  “in  themselves”  for  either 
party.  This  is  a  fallacy  in  the  plausible  ground  taken  by  the  Iowa  Commis¬ 
sion,  perhaps  the  ablest  body  of  the  kind  in  the  country.  They  say  (Rep., 
1882,  p.  556,  case  of  Township  Trustees  of  Red  Oak  vs.  C.,  B.,  and  Q.), 
“from  the  standpoint  of  the  carriers’  interest  it  is  needless  to  make  a  rate 
less  than  what  is  fair  and  reasonable,”  and  “from  the  shippers’  standpoint 
the  rate  should  not  be  more  than  fair  and  reasonable,”  and,  again  (Rep., 
1884,  p.  13),  “the  Commissioners  still  believe  the  position  [above  quoted] 
to  be  correct.  .  .  .  The  Commissioners  will  labor  for  reasonable  rates, 

insisting  as  against  the  carrier  that  it  shall  not  be  more  than  reasonable, 
and  as  against  shipper  that  it  shall  not  be  less  than  reasonable.” 

Unfortunately  these  principles  fail  where  they  are  most  needed.  If  the 
parts  of  the  conclusion  mean  any  thing,  the  whole  is  often  useless.  A  reason¬ 
able  rate  “from  the  standpoint  of  the  carrier”  is  one  which  gives  a  reason- 


I32 


RAILROAD  TRANSPORTATION . 


Unfortunately  the  railroads  were  managed  in  such  a 
way  that  it  seemed  as  if  they  were  directly  responsible  for 
pretty  much  all  these  evils.  In  the  first  place,  they  were 
run  recklessly,  with  a  most  short-sighted  view  to  present 
interests  only.  •  Outrageous  favors  were  given  in  the  way 
of  special  rates.  Where  there  was  but  one  railroad,  it 
charged  all  that  it  could  extort.  When  the  farmer  had 
once  settled  so  far  from  any  market,  he  was  at  the  mercy 
of  the  railroad,  which  furnished  his  sole  means  of  trans¬ 
portation. 

But  where  there  were  two  competing  roads  they  brought 
rates  down  to  a  point  where  they  only  paid  operating  ex¬ 
penses,  and  not  any  share  of  the  fixed  charges.  The 
resulting  discriminations  were  enormous  ;  and  these  dis¬ 
able  profit  above  operating  expenses.  A  reasonable  rate  “  from  the  shipper’s 
standpoint  ”  is  one  which  leaves  the  shipper  a  fair  margin  of  profit  above 
cost  of  production  of  the  goods.  The  trouble  at  the  present  time  is  that  the 
price  of  wheat  is  so  low  that  it  is  impossible  to  get  a  reasonable  profit  for 
either  party.  A  rate  which  is  low  enough  to  be  reasonable  for  the  shipper 
will  be  utterly  unreasonable  to  the  railroad,  and  vice  versa.  The  commis¬ 
sioners  wish  to  apply  two  independent  standards  which  cannot  be  made  to 
meet.  The  only  practical  solution  of  the  difficulty  is  a  compromise,  based 
upon  a  careful  consideration  of  what  the  traffic  will  bear ,  the  necessities  and 
interests  of  the  shippers  as  well  as  of  the  railroads  being  taken  into  account. 
But  any  such  compromise  is  far  from  meeting  the  demand  of  the  commis¬ 
sioners,  that  it  should  be  reasonable  for  each  party.  On  the  contrary,  from 
the  standpoint  of  either  party  separately,  it  will  be  utterly  unreasonable. 

We  have  no  doubt  that  the  sagacity  of  the  Iowa  Commission  would  pre¬ 
vent  them  from  making  serious  trouble  by  undertaking  to  apply  their  prin¬ 
ciple  to  specific  cases  which  it  did  not  fit.  Even  in  the  decision  quoted, 
they  recognized  the  necessity  of  considering  value  of  service.  But  it  is  none 
the  less  a  pity  that  they  should  enunciate  a  theory  of  railroad  rates  which 
breaks  down  at  the  critical  point  when  you  attempt  to  apply  it.  And  the 
evil  is  all  the  more  serious  because  nine  tenths  of  the  people  who  read  the 
Iowa  report  will  accept  this  theory  as  self-evident  truth,  and  thereby  justify 
themselves  in  the  use  of  it  from  their  own  standpoint,  without  reference  to 
that  of  any  one  else. — See  Railroad  Gazette ,  1885,  p.  91. 


RAILROAD  LEGISLATION. 


133 


criminations  seemed  to  be  the  reason  why  farming  did  not 
pay.  The  farmer  reasoned,  first,  that  if  he  could  get  the 
rates  which  competitive  points  enjoyed,  he  could  sell  his 
wheat  in  Chicago  and  have  some  profit  left  ;  and,  second, 
if  the  roads  could  afford  to  carry  for  the  competing  points 
at  these  rates,  they  could  afford  to  do  the  same  for  him.1 
The  additional  charge  on  the  part  of  the  road  seemed  to 
him  to  be  just  so  much  taken  out  of  his  pocket  for  the 
benefit  of  the  capitalists.  What  made  matters  worse  was 
that  these  capitalists  were  living  in  the  Eastern  States  or 
in  Europe,  and  were  regarded  by  the  farmer  as  the  ab¬ 
sentee  landlord  is  regarded  by  the  Irish  tenantry.  What¬ 
ever  was  paid  to  the  railroad  owner  seemed  like  so  much 
direct  drain  on  the  resources  of  the  community.  There 
was  thus  a  conflict  of  local  interests,  which  added  a  politi¬ 
cal  strain  to  the  industrial  one  already  existing.  But  the 
railroad  owners  did  not  perceive  the  danger ;  still  less  did 
they  take  any  measures  to  avert  it.  They  were  managed 
with  a  view  to  the  supposed  interests  of  Eastern  capital¬ 
ists  without  much  real  regard  for  the  needs  of  the  country 
which  they  served.  Too  often,  in  the  treatment  of  the 
farmers,  the  railroad  agents  added  insult  to  injury.  A 
state  of  feeling  was  developed  through  the  community 
which  only  wanted  organization  to  become  all  powerful. 
It  found  this  organization  in  the  Granges. 

That  the  movement  against  the  railroads  should  come, 
was  inevitable.  That  it  took  this  particular  instrument 
to  make  itself  felt,  was  in  some  sense  an  accident.  When 
the  first  Granges  were  formed,2 3  the  purposes  of  the  or¬ 
ganization  were,  first,  to  render  farmers’  homes  attractive, 

1  We  can  hardly  blame  him  for  this,  when  the  editor  of  the  London  Econo¬ 
mist,  the  highest  authority  of  the  kind  in  the  world,  fifteen  years  later,  falls 

into  precisely  the  same  fallacy. — Econ 1885,  pp.  66,  316. 

3 1867-70. 


134 


RAILROAD  TRANSPORTATION. 


and,  second,  to  make  farming  more  productive.  As  a 
means  to  this  second  end,  they  sought  to  diminish  the 
expenses ;  and  one  of  the  most  important  elements  of 
expense  was  the  cost  of  getting  goods  to  market.  It  was 
thus  that  they  became  interested,  as  an  organization,  in 
questions  of  transportation  and  of  railroad  control.  Their 
first  utterances  on  this  matter  were  moderate  ;  it  was  but 
gradually  that  they  became  the  instrument  of  popular 
agitation. 

The  first  tangible  results  were  reached  in  Illinois.1  The 
constitutional  convention  of  1870  made  an  important 
declaration  concerning  State  control  of  rates,  on  the  basis 
of  which  a  law  was  passed  in  1871,  establishing  a  system 
of  maxima.  This  law  was  pronounced  unconstitutional 
by  Judge  Lawrence.  The  result  was  that  he  immediately 
afterward  failed  of  re-election,  solely  on  this  ground.  The 
defeat  of  Judge  Lawrence  showed  the  true  significance  of 
the  farmers’  movement.  They  were  concerned  in  secur¬ 
ing  what  they  felt  to  be  their  rights,  and  they  were 
unwilling  that  any  constitutional  barriers  should  be  made 
to  defeat  the  popular  will.  They  had  reached  the  point 
where  they  regarded  many  of  the  forms  of  law  as  mere 
technicalities.  They  were  dangerously  near  the  point 
where  revolutions  begin. 

But  they  did  not  pass  the  point.  The  law  of  1873 
avoided  the  issue  raised  by  Judge  Lawrence  against  that 
of  1871.  Instead  of  directly  fixing  maxima,  it  provided 
that  rates  must  be  reasonable,  and  then  further  provided 
for  a  commission  to  fix  reasonable  rates.  Similar  laws 
were  passed  by  Iowa  and  Minnesota  almost  immediately 
afterward.  The  Legislature  of  Wisconsin  went  even 

1  A  partial  exception  should  be  made  in  the  case  of  Ohio,  where  a  law 
regulating  freight  charges  was  passed  in  1870,  but  does  not  seem  to  have 
been  enforced. 


RAILROAD  LEGISLATION. 


135 


farther,  fixing,  by  the  so-called  Potter  Law,1  the  rates  on 
different  classes  of  roads  at  figures  which  proved  quite  un- 
remunerative.  The  railroads  made  vain  attempts  to  con¬ 
test  these  regulations  in  the  courts.  They  were  defeated 
again  and  again,  and  finally,  in  1877,  the  Supreme  Court 
of  the  United  States  sustained  the  constitutionality  of  the 
Granger  laws. 

But  a  more  powerful  force  than  the  authority  of  the 
courts  was  working  against  the  Granger  system  of  regu¬ 
lation.  The  laws  of  trade  could  not  be  violated  with  im¬ 
punity.  The  effects  were  most  sharply  felt  in  Wisconsin. 
The  law  reducing  railroad  rates  to  the  basis  which  com¬ 
petitive  points  enjoyed,  left  nothing  to  pay  fixed  charges. 
In  the  second  year  of  its  operation,  no  Wisconsin  road 
paid  a  dividend  ;  only  four  paid  interest  on  their  bonds. 
Railroad  construction  had  come  to  a  standstill.  Even 
the  facilities  on  existing  roads  could  not  be  kept  up. 
Foreign  capital  refused  to  invest  in  Wisconsin;  the 
development  of  the  State  was  sharply  checked  ;  the  very 
men  who  had  most  favored  the  law  found  themselves 
heavy  losers.  These  points  were  plain  to  every  one.  They 
formed  the  theme  of  the  Governor’s  message  at  the  be¬ 
ginning  of  1876.  The  very  men  who  passed  the  law  in 
1874,  hurriedly  repealed  it  after  two  years’  trial.  In  other 
States  the  laws  either  were  repealed,  as  in  Iowa,  or  were 
sparingly  and  cautiously  enforced.2  By  the  time  the 

1  The  original  bill  had  been  much  like  that  of  Illinois  ;  but  the  railroads, 
who  were  not  strong  enough  to  defeat  such  a  bill,  hoped  that  they  might  be 
able  to  defeat  a  worse  one.  They  accordingly  allowed  a  series  of  changes 
which  made  the  provisions  much  more  stringent.  They  might  have  defeated 
these  changes  had  they  tried.  They  did  not  try,  because  they  thought  the 
amendments  would  kill  the  bill.  In  this  they  were  deceived.  (See  N.  Y. 
Nation ,  xx.,  189.) 

2  See  Reports  of  Commissioners  of  Illinois,  Missouri,  (recently)  Kansas, etc. 


136 


RAILROA  D  TRAN SP OR  TA  TIONl 


Supreme  Court  published  the  Granger  decisions,  the  fight 
had  been  settled,  not  by  constitutional  limitations,  but 
by  industrial  ones. 

Similar  efforts  to  establish  rates  by  commissions  for  the 
purpose,  have  been  tried  in  other  parts  of  the  country.1 
It  is  in  the  Southern  States  that  such  commissions  have 
been  most  successful  in  exercising  their  powers.  Georgia 
has  been  the  centre  of  this  movement,  though  other 
commissions  of  the  same  sort  have  been  established  in 
adjoining  States.  It  is  a  little  hard  to  say  just  what  has 
enabled  them  to  succeed.  One  thing  is,  that  the  rates  in 
general  are  so  high  as  to  leave  them  a  wide  margin  above 
operating  expenses  in  which  to  make  their  changes.  An¬ 
other  thing  is,  that  the  competitive  business  is  so  well 
pooled  that  the  railroads  have  their  hands  free  to  bring 
through  and  local  charges  into  proportion.2 3 

There  is  another  class  of  commissions  of  quite  different 
character ;  commissions  with  little  or  no  power  to  act, 
and  simply  established  for  the  sake  of  securing  publicity. 
The  success  of  such  commissions  has  been,  in  some 
instances,  surprisingly  great.  This  was  especially  the 
case  with  Massachusetts,  under  the  leadership  of  Charles 
Francis  Adams,  Jr.  The  Massachusetts  commission  was 
established  in  1869.  At  first  a  great  many  people  were 

1  The  California  Commission  has  had  an  interesting  history,  too  long  to 
be  detailed.  It  undertook  far  more  than  could  possibly  be  carried  out ;  and 
the  Central  Pacific  was  able  to  defy  or  evade  its  authority  completely. — 
See  H.  D.  Lloyd  :  “  California  Cornered,”  Chicago  Tribune ,  Oct.  8  and 

13,  1883. 

3  The  South  Carolina  legislation  of  1883  was  fully  as  stringent  as  that  of 
Georgia  ;  but  some  of  its  strictest  provisions  were  repealed  after  one  year’s 
trial.  The  legislation  of  Alabama  has  never  gone  quite  so  far  as  that  of 
Georgia.  In  Tennessee,  a  recent  adverse  decision  of  the  courts  has  deprived 
the  enactment  of  much  of  its  force.  In  Georgia  itself  a  reaction  against  ex¬ 
cessive  regulation  seems  to  be  in  progress. 


RAILROAD  LEGISLATION. 


13  7 


disposed  to  treat  it  with  good-natured  ridicule.  It  had 
really  no  power  except  the  power  to  report.  But  its 
reports  were  strong  enough  to  command  respect,  and  even 
obedience.  The  commissioners  were  by  no  means  in¬ 
fallible.  Some  of  their  theories  were  wrong.  They  were 
in  favor  of  a  partial  State  ownership  of  railroads,  which 
could  not  have  done  what  they  expected  of  it,  and  would 
probably  have  proved  a  great  misfortune.  But  the  com¬ 
missioners  had  something  better  than  correct  theories: 
they  had  practical  business  sagacity.  They  abandoned 
courses  which  proved  wrong ;  they  followed  up  with  suc¬ 
cessful  persistence  those  which  proved  right.  Gradually, 
but  surely,  they  introduced  improvements  in  accounting, 
which  since  1878  have  been  further  extended  by  the  com¬ 
missioners  of  other  States.  In  the  same  way  they  virtually 
compelled  the  roads  to  adopt  safety  appliances,  by  edu¬ 
cating  public  opinion  to  a  point  where  it  demanded  such 
action.  And  in  the  same  way  they  exercised  a  decisive 
influence  on  the  policy  of  the  railroads  with  regard  to 
rates ;  leading  them  to  develop  their  local  business,  in¬ 
stead  of  confining  attention  to  the  through  business. 

Two  things  aided  them  in  this  matter :  In  the  first 
place,  in  spite  of  the  prevailing  impression  to  the  contrary, 
corporations  are  sensitive  to  public  opinion.  Even  when 
their  managers  are  not,  their  owners  are.  For  corporate 
property  is  so  new  a  thing  that  it  has  not  acquired  the 
immunity  from  interference  which  long  usage  gives,  and 
its  owners  know,  or  are  forced  to  learn,  that  they  must 
keep  the  public  in  good  humor  if  they  would  not  have 
their  rights  curtailed. 

Another  fact  which  helps  an  intelligent  commission  is 
that  the  permanent  interests  of  the  corporations  and  the 
public  are  almost  always  closely  allied,  however  much 


138 


RAILROAD  TRANSPORTATION’. 


their  tempory  interests  may  seem  to  differ.  If  the  object 
of  a  railroad  manager  is  simply  to  pay  as  large  a  dividend 
as  possible  for  the  current  year,  he  can  best  do  it  by 
squeezing  his  local  traffic,  of  which  he  is  sure,  and  secur¬ 
ing  through  traffic  at  the  expense  of  other  roads  by 
specially  low  rates — that  is,  by  a  policy  of  heavy  discrim¬ 
ination.  But  the  permanent  effect  of  such  a  policy  is  to 
destroy  the  local  trade,  which  gives  a  road  its  best  and 
surest  custom,  and  to  build  up  a  trade  which  can  go  by 
another  route  whenever  it  pleases.  The  permanent  ef¬ 
fect  of  such  a  policy  is  thus  ruinous  to  the  railroad  as  well 
as  the  local  shipper.1 

By  securing  publicity  of  management  you  do  much  to 
prevent  the  permanent  interests  of  the  railroads  from 
being  sacrificed  to  temporary  ones.  By  protecting  the 
permanent  interests  of  the  railroads  you  go  far  toward 
securing  the  permanent  interests  of  the  public  ;  you  en¬ 
list  the  stockholders  and  the  best  class  of  railroad  man¬ 
agers  on  the  side  of  sound  policy.  This  is  practically 
what  the  Massachusetts  Commission  did  ;  and  never  was 
work  more  fully  justified  by  its  fruits.2 

It  would  be  a  mistake  to  suppose  that  because  the  sys¬ 
tem  worked  so  well  in  Massachusetts,  it  must  work  equal¬ 
ly  well  elsewhere.  We  are  apt  to  lay  too  much  stress  on 
the  effects  of  a  mere  law  or  form.  It  succeeded  in  Mas¬ 
sachusetts,  partly  because  it  was  in  the  hands  of  able  men, 
partly  because  the  Massachusetts  railroad  system  was  so 
old  that  it  had  acquired  a  certain  stability.  Many  abuses 

1  Germany  and  Austria  have  recognized  this  fact,  by  establishing  the  ad¬ 
visory  board  ( Eisenbahnrath ),  through  which  representatives  of  different 
localities  and  industries  can  bring  their  influence  to  bear  on  railroad  manage¬ 
ment. 

2  W.  A.  Crafts  :  Ten  Years'  Working  of  the  Mass.  R.  R.  Commission. 
Railroad  Gazette ,  N.  Y.,  1883. 


RAILROAD  LEGISLATION. 


139 


incident  to  a  period  of  rapid  growth  had  passed  away,  or 
were  in  a  fair  way  to  regulate  themselves.  These  same 
abuses,  in  newer  sections  of  the  country,  might  baffle  all 
attempts  at  regulation.  It  is  impossible  to  apply  one  sys¬ 
tem  to  all  conditions.  You  could  no  more  have  applied 
European  methods  to  our  Western  railroads  than  you 
could  regulate  the  growth  of  an  oak  by  tying  tape  meas¬ 
ures  around  its.  branches. 

For  this  reason  the  success  of  the  Iowa  Commission  is 
in  some  respects  more  remarkable  than  that  of  Massachu¬ 
setts.  The  ground  was  larger,  the  country  newer,  the  busi¬ 
ness  less  stable.  Above  all  there  were  the  difficulties  of 
absentee  ownership,  already  alluded  to.  But  there  were 
certain  counterbalancing  advantages,  which  the  commis¬ 
sioners  knew  how  to  make  the  most  of.  The  commission 
was  organized  in  1878,  just  after  the  failure  of  the  Granger 
movement.  Both  parties,  the  railroads  and  the  public,  saw 
that  they  could  not  act  independently  of  one  another.  Both 
looked  to  the  commissioners  to  help  them  to  come  to  an 
understanding.  As  in  Georgia,  the  through  business  was 
pooled  in  such  a  way  that  the  roads  had  their  hands  com¬ 
paratively  free  to  serve  local  interests.  The  commission 
under  these  circumstances  acted  as  the  representative  of 
both  parties,  and  seems  to  have  commanded  the  con¬ 
fidence  of  both.1 

The  really  efficient  State  regulation  is  now  almost  en¬ 
tirely  under  the  somewhat  discretionary  power  of  commis¬ 
sioners,  whether  these  powers  be  wide  or  limited.2  A 

1  Of  late,  its  powers  have  been  increased.  The  commissioners  themselves 
regard  this  change  as  a  dangerous  experiment. — Rep.  Iowa  Com.,  18S4, 

p.  42. 

2  Commissions  more  or  less  closely  resembling  that  of  Massachusetts  exist 
in  Connecticut,  Iowa,  Maine,  Michigan,  Minnesota,  New  Hampshire,  New 
York,  Ohio,  Rhode  Island,  Vermont,  Virginia,  and  Wisconsin.  Somewhat 


J  RA ILR  OA  D  TRA  N SPOR  PA  TION. 

hard  and  fast  law  cannot  be  enforced.  Many  States  have 
on  their  statute-books  the  so-called  short-haul  law,  whic 
says  that  a  road  shall  not  charge  more  for  part  of  a  given 
route  than  for  the  whole.  Yet  even  where  there  is  a  pre- 

tence  of  enforcing  this  law,  a  great  many  » 

are  quietly  overlooked.  Each  individual  State  su 
from  want  of  jurisdiction.  State  commerce  and  inter¬ 
state  commerce  are  so  mixed  that  it  becomes 
possible  to  adjust  the  relations  between  the  two. 

This  is  what  gives  force  to  the  demand  for  congressional 
regulation  of  inter-State  commerce.  Of  the  right  of  C  - 
gress  to  take  such  action  there  can  be  no  question.  Little 
use  has  thus  far  been  made  of  that  right.  A  pure  y  per¬ 
missive  act  (1865)  authorizes  roads  to  make  through  co  - 
nections,  etc. ;  an  act  of  1873  provides  certain  regula¬ 
tions  fo;  the  treatment  of  cattle.  The  general  que^ion 
of  regulating  railroad  charges  was  not  discussed  until _  th 

influence  of  the  Granger  movement  began  to  make  itself 

felt.  Since  1873  the  matter  has  constantly  been  before 
Congress  The  House  has  passed  bills  on  the  subject  two 
or  three  times,  and  the  Senate  once ;  but  they  have  never 
been  able  to  agree.  In  1878  the  Reagan  bill  was  fin*  in¬ 
troduced  to  the  notice  of  the  House  Since  that  time  it 
has  been  almost  constantly  under  discussion.  Various 
substitutes  have  been  proposed  ;  the  bill  itself  has  been 
modified  in  some  of  its  essential  features.  n  1  s 
recent  shape  it  strictly  forbids  discrimination  local  as  well 
as  personal ;  prohibits  pools  ;  and  provides  for  the  estab¬ 
lishment  of  a  commission  with  somewhat  active  power  • 

The  House  Committee  in  the  last  session  (1884-5)  substi 
tuted  a  much  less  stringent  bill.  The  House  itself  reversed 

wider  powers  are  enjoyed  by  the  commissioners  in  Illinois,  Kansas,  Ken- 
lucky,  and  Missouri — also  in  the  States  referred  to  on  p.  136. 


RAILROAD  LEGISLATION. 


141 

the  action  of  the  committee,  and  passed  the  Reagan  bill, 
The  Senate  substituted  a  more  moderate  bill  of  its  own, 
Ultimately  no  agreement  was  reached,  and  nothing  was 
done. 

All  the  bills  agree  in  trying  to  stop  purely  personal  dis¬ 
criminations,  and  in  providing  for  a  commission  of  some 
sort.  They  also  agree,  for  the  most  part,  in  trying  to 
secure  publicity  of  rates.  The  points  at  issue  are:  1. 
Whether  local  as  well  as  personal  discriminations  shall  be 
prohibited  ;  that  is,  whether  the  bill  shall  contain  a  “  short- 
haul  clause.”  2.  Whether  pools  shall  be  prohibited  as 
well  as  discriminations.  3.  Whether  the  commissioners 
shall  try  to  determine  what  constitutes  a  reasonable  rate, 
and  to  fix  maximum  or  minimum  limits  for  railroad  rates. 
4.  Whether  the  commission  shall  have  administrative 
powers,  or  only  advisory  ones. 

The  difficulties  under  the  first  head  are  chiefly  of  a 
practical  character.  The  short-haul  principle  is  right 
enough  in  most  cases.  As  a  statement  of  what  is  gener¬ 
ally  best  for  the  community,  or  as  a  general  line  of  railroad 
policy,  it  is  undeniably  right.1  Apart  from  the  temporary 
disturbance  of  business  there  would  be  no  great  objection 
to  enforcing  it  by  law,  provided  that  law  can  be  made 
to  reach  all  the  rival  routes .  If  it  cannot,  you  cripple  one 
set  of  routes  to  the  advantage  of  another.  Consider  what 
would  be  the  probable  effect  if  Congress  should  pass  a 
short-haul  bill,  and  it  should  be  found  possible  to  enforce 
it.  Our  roads  would  then  be  forbidden  to  make  their 
through  rates  lower  than  their  local  ones.  They  could  not 

1  It  is  also  undeniable  that  our  railroad  managers  have  violated  it  to  an 
extent  which  is  unjustifiable  even  from  the  point  of  view  of  the  railroad 
owners  themselves.  Compare  the  statements  of  Pres.  Devereux  of  the  C.,  C., 
C. ,  &  I.,  before  the  special  committee  of  the  U.  S.  Senate,  1885,  and  else¬ 
where. 


- — 


142  RAILROAD  TRANSPORTATION. 

reduce  their  local  rates  to  the  standard  of  their  through 
rates  without  destroying  their  profits.  They  would  have 
to  raise  their  through  rates.  This  would  have  the  effect 
of  sending  through  shipments  of  gram  via  Canada,  where 
the  roads  would  be  subject  to  no  such  restriction.  The 
chief  gainers  from  the  passage  of  any  such  bill,  and  almost 
the  only  ones,  would  be  the  Englishmen  who  own  the 
Grand  Trunk  Railway  of  Canada.  Similar  attempts  in 
Europe,  backed  by  far  greater  power  and  opposed  by  less 
obstacles,  have  failed  from  precisely  the  same  difficulties— 
either  international  competition,  or  the  competition  of 

water  routes.  #  n  -t  ^ 

The  problem  is  comparatively  new  in  the  United  btates. 

It  is  old  in  Europe ;  and  the  result  of  European  experi¬ 
ence  has  been  to  give  up  trying  to  prohibit  pools  and  dis¬ 
criminations  at  the  same  time.  It  is  probably  not  too 
much  to  say  that  no  law  has  ever  seriously  discour¬ 
aged  either  of  these  things  without  at  the  same  time  en¬ 
couraging  the  other.  That  this  is  so,  is  plain  matter  of 
history.  It  is  not  hard  to  explain  why  it  must  almost  of 

necessity  be  so.  .  .  , 

We  have  seen  that  railroad  expenses  are  of  two  kinds, 

fixed  charges  and  movement  expenses.  The  latter  vary 

with  the  amount  of  business  done,  the  former  do  not, 

except  to  a  comparatively  slight  extent.  We  have  further 

seen  that  competition  tends  to  bring  rates  down  to  the 

basis  of  movement  expenses.  Now  railroad  competition 

may  exist  everywhere,  somewhere,  or  nowhere.  If  it 

exists  everywhere,  rates  are  everywhere  reduced  to  the 

level  of  movement  expenses,  and  there  is  nothing  to  pay 

fixed  charges,  as  with  the  West  Shore  to-day.  If  there  is 

competition  somewhere,  the  competitive  points  will  have 

rates  based  on  movement  expenses,  and  the  others  will 


RAILROAD  LEGISLATION. 


143 


have  to  pay  the  fixed  charges.  This  constitutes  discrim¬ 
ination.  If  we  have  competition  nowhere,  this  either  in¬ 
volves  a  pool,  or  amounts  to  the  same  thing.  We  are 
thus  face  to  face  with  the  choice  between  ruin,  discrimina¬ 
tion,  or  pools.  The  first  is  out  of  the  question,  the  second 
is  the  very  evil  which  we  are  trying  to  avoid. 

Unfortunately  the  third  alternative  is  not  altogether 
satisfactory.  The  history  of  pools  has  been  a  checkered 
one.  The  men  who  are  trying  to  stop  arbitrary  abuses  of 
the  railroad  power  do  not  like  to  adopt  a  means  which 
shall  render  that  power  itself  all  the  stronger.  They  are 
disposed  to  believe  that  legal  enactments  if  made  stringent 
enough  can  do  directly  what  pools  can  do  indirectly. 
There  is  much  reason  to  doubt  whether  they  can.  At 
best  such  enactments  bear  most  heavily  on  the  good  roads. 
A  road  whose  management  is  above  board  is  exposed  to 
the  penalty  of  the  law,  which  a  trickily  managed  road  can 
evade.  We  have  elsewhere  1  shown  reason  to  believe  that 
the  danger  of  pools  was  exaggerated.  We  have  never  in 
the  past  given  them  a  fair  chance.  By  regarding  them  as 
illegal  from  the  outset,  and  refusing  to  give  them  the 
sanction  of  the  law,  we  have  made  it  almost  necessary  for 
them  to  pursue  a  short-sighted  policy.  Countries  which 
have  not  forbidden  pools  have  found  it  possible  to  regu¬ 
late  them  far  more  easily  than  they  could  regulate  roads 
which  were  outside  of  such  combinations. 

If  discrimination,  and  especially  personal  discrimination, 
is  the  main  evil,  it  seems  best  to  strike  squarely  at  that 
with  all  our  might,  and  not  waste  our  power  by  pursuing 
other  more  or  less  conflicting  aims,  or  by  fighting  other 
less  serious  abuses. 

The  effort  to  establish  maximum  and  minimum  rates 


1  Pages  76,  77. 


144  RAILROAD  TRANSPORTATION. 

seems  unlikely  to  be  successful.  It  would  hardly  do  to 
place  the  minimum  rate  very  far  above  the  competitive 
rate.1  On  the  other  hand,  it  will  not  do  to  place  the  maxi¬ 
mum  rate  too  low  to  cover  its  share  of  the  fixed  charges 
if  the  road  should  lose  its  competitive  business.  These 
limits  are  so  wide  apart  that  they  would  be  almost  inopera¬ 
tive.  The  same  indefiniteness  attaches-  to  the  idea  of  a 
“  reasonable  rate.”  On  what  basis  are  we  to  compute  it  ? 
It  has  been  recognized  under  the  common  law  that  rates 
should  be  reasonable  ;  the  whole  difficulty  has  lain  in  de¬ 
fining  what  constitutes  a  reasonable  rate.  Such  a  clause 
might  be  useful  in  extending  the  jurisdiction  of  the  com¬ 
missioners  to  cases  not  otherwise  provided  for  ;  it  is  hard  to 
see  how  it  could  furnish  any  definite  guide  for  their  action. 

This  brings  us  face  to  face  with  the  question  how  far  it 
is  desirable  that  the  commission  should  have  judicial  or 
administrative  powers  at  all.  The  general  opinion  seems 
to  be  that  some  such  powers  ought  to  be  given.  But 
there  are  important  reasons  on  the  other  side.  First,  the 
really  successful  commissions  in  the  United  States  have 
been  established  with  the  purpose  of  securing  publicity 
rather  than  with  the  purpose  of  executing  judgment. 
Now,  strange  as  it  may  seem,  the  possession  of  active 
general  powers  is  a  hindrance  in  this  respect.  A  railroad 
may  be  ready  to  give  information  to  an  outside  party, 
which  it  would  not  give  to  a  judge  who  might  some  time 
use  that  information  against  it.  For  the  sake  of  enforcing 
the  law  in  a  few  cases  we  might  readily  sacrifice  the  power 
of  influencing  public  opinion  rightly  in  a  great  many  cases. 
Again,  a  commission  with  judicial  powers  is  almost  cer¬ 
tain  to  magnify  its  own  office.  This  danger  made  itself 
strongly  felt  in  England,  where  the  English  Commission 


1  Chiefly  because  it  would  prevent  the  development  of  low-grade  traffic. 


RAILROAD  LEGISLATION . 


145 


constantly  undertakes  more  than  it  can  accomplish.1  The 
United  States  Commission  might  decide  a  few  cases; 
but  its  authority  would  be  evaded  in  a  hundred  times  as 
many  more.  The  worst  evil  which  could  possibly  befall 
us,  would  be  the  attempt  to  apply  a  great  deal  of  regula¬ 
tion  somewhere,  by  an  agency  which  was  not  strong 
enough  to  enforce  such  regulation  everywhere. 


1  Chap.  ix. 


CHAPTER  VIII. 


THE  ENGLISH  RAILROAD  SYSTEM. 

Contrast  between  the  railroad  systems  of  England  and  the  United  States — 
Relations  of  railroads  to  the  investors  ;  to  the  shippers  ;  to  one  another  ; 
to  the  law — Capital  and  earnings — Rates  for  passengers  and  freight — 
Organization  of  railroad  service — The  Clearing-House.1 

For  references  to  books  see  chapter  ix. 

The  feature  of  the  English  railroad  system  which  most 
forcibly  strikes  an  American  observer,  is  its  stability. 
This  is  the  fundamental  difference  between  their  railroads 
and  ours.  It  shows  itself  in  their  construction,  their  man¬ 
agement,  and  their  legal  relations.  The  mere  traveller  sees 
it  in  the  massive  stone  bridges,  the  tunnels  and  viaducts,  the 
station  accommodations,  and  a  thousand  details  of  less 
importance  which  combine  to  produce  an  impression,  of 
solidity  and  finish,  entirely  wanting  in  the  majority  of 
American  railroads.  The  statistician  sees  it  in  the  figures 
showing  the  cost  per  mile  of  road,  which  in  America  is  little 
over  $60,000,  and  in  England  is  more  than  $200,000.  The 
railroad  man  sees  it  still  more  strongly  when  he  compares 
the  permanent  traffic  agreements,  and  smooth  workings  of 
the  Railway  Clearing-House  in  England,  with  the  alter¬ 
nation  of  free  fights  and  hollow  truces  which  has  marked 
the  history  of  the  Joint  Executive  Committee  in  America. 
The  historian  feels  it  most  strongly  of  all,  when  he  sees 
the  vigor,  often  obstinate  and  sometimes  blustering,  with 

1  Much  of  the  material  in  this  and  the  following  chapters  has  appeared  in 
the  Railroad  Gazette ,  in  the  course  of  the  years  1884  and  1885. 

146 


THE  ENGLISH  RAILROAD  SYSTEM. 


147 


which  the  English  railroads  or  the  English  shippers  defend 
what  they  deem  to  be  their  vested  rights,  and  when  he  con¬ 
trasts  with  it  the  painful  helplessness  of  American  Legisla¬ 
tures  against  the  railroads  at  one  point,  or  of  American 
railroads  against  the  Legislature  at  another. 

Many  writers  on  both  sides  of  the  Atlantic  assume  that 
the  differences  in  railroad  management  between  England 
and  the  United  States  are  in  large  measure  the  result  of 
differences  in  legislation.  This  is  a  mistake.  It  would  be 
nearer  the  truth  to  say  that  the  differences  in  legislation 
were  the  result  of  differences  in  management.  The  fact 
probably  is  that  the  different  systems,  of  management 
and  legislation  both,  are  an  almost  inevitable  outgrowth 
of  the  different  industrial  conditions  of  the  two  countries; 
and  that  any  scheme  of  government  policy  has  counted 
for  little  in  either  case. 

The  English  railroads  were  mainly  built  to  accommo¬ 
date  and  extend  existing  business.  As  the  facilities  were 
increased,  the  business  grew  enormously  ;  but  for  the  most 
part,  on  lines  which  already  existed  before  railroads  were 
thought  of.  On  the  other  hand,  the  American  railroads 
have  been  mainly  built  with  a  view  to  the  development 
of  new  lines  of  traffic,  new  establishments,  or  even  new 
cities.  The  Englishman  built  for  the  present  and  future 
both ;  the  American  chiefly,  and  sometimes  entirely,  for 
the  future. 

This  hope  of  future  gains,  but  of  all  proportion  to  pres¬ 
ent  traffic,  of  necessity  gave  railroad  business  in  America 
a  more  speculative  character  than  in  England.  It  did  more 
than  that.  This  original  difference  of  purpose  laid  the 
foundation  for  almost  every  other  prominent  difference 
between  the  two  systems.  It  was  an  all-important  factor 
in  determining  the  relations  of  a  railroad  to  its  investors, 
to  its  patrons,  to  other  railroads,  and  to  the  law. 


148 


RAILROAD  TRANSPORTATION. 


1.  Railroads  and  Investors.  —  The  English  railroads 
were  originally  built  to  meet  the  demands  of  a  commun¬ 
ity  which  already  enjoyed  good  roads  and  canals,  and 
insisted  on  having  good  and  secure  railroad  service. 
Capital  was  abundant ;  it  was  spent  freely  and  sometimes 
lavishly.  Double  track  was  habitually  laid,  grade  crossings 
were  avoided,  and  every  effort  was  made  to  construct  the 
road  under  a  high  standard  of  engineering  art.  The  re¬ 
sult  was  that  the  original  line  required  but  slight  changes. 
There  were  many  improvements  made,  but  there  was 
comparatively  little  actual  reconstruction. 

American  railroads,  on  the  other  hand,  were  frequently 
built  where  existing  business  and  existing  means  of  com¬ 
munication  amounted  to  little  or  nothing ;  where  capital 
was  scarce,  and  where  speedy  and  economical  construction 
was  more  desired  than  solidity  or  safety.  The  question 
was  not  what  kind  of  a  railroad  they  were  to  have,  but 
whether  they  were  to  have  any  at  all.  To  avoid  the  ex¬ 
pense  of  cuttings  and  embankments  the  line  was  adapted  as 
far  as  possible  to  the  natural  inequalities  of  the  ground. 
There  were  heavy  grades  and  sharp  curves.  Sleepers  were 
laid  directly  upon  the  ground  without  ballast.  The  station 
accommodations  were  insufficient  to  afford  protection  from 
the  weather. 

As  traffic  grew,  many  of  these  things  had  to  be  changed. 
But  the  changes  were  not  mere  improvements,  as  in 
England  ;  they  involved  total  reconstruction.  Their  cost 
was  often  out  of  all  proportion  to  the  original  investment. 
The  easiest  way  to  provide  the  money  for  such  changes 
was  by  an  issue  of  bonds.  Where  the  improvements  cost 
more  than  the  road,  the  bondholders’  investment  amounted 
to  more  than  the  stockholders’.  The  managers  of  these 
roads  were  chiefly  dealing  with  borrowed  capital,  to  which 


THE  ENGLISH  RAILROAD  SYSTEM. 


I49 


they  were  not  directly  accountable.  From  this  it  was  but 
a  step  to  the  system  of  building  roads  by  the  proceeds  of 
the  bonds,  where  the  actual  investment  on  the  part  of  the 
stockholders  amounted  to  little  or  nothing — a  practice 
which  has  at  times  been  wellnigh  universal  in  America. 

From  this  abuse  of  the  borrowing  power  of  corporations 
and  the  worst  forms  of  stock-watering,  England  has  been 
free.  The  proportion  of  bonds  or  “  debentures  ”  to  stock 
has  been  kept  down  to  a  low  figure.  Directors  have  been 
held  to  their  responsibility  far  better  than  in  America. 
They  are  not  allowed  to  make  lucrative  contracts  with 
concerns  in  which  they  are  themselves  interested.  It  is 
true  that  there  have  been  abuses  of  trust,  and  serious 
losses  of  capital.  The  railroad  mania  of  18451  England 
was  even  wilder  than  that  of  1871  or  1882  in  America. 
But  the  speculation  was  at  the  peril  of  the  shareholders 
themselves,  and  was  not  done  with  borrowed  capital 
obtained  from  bondholders  under  false  pretences. 

2.  Railroads  and  their  Patrons.  Railroad  Service. — The 
English  roads  were  organized  at  the  outset  with  the  inten¬ 
tion  of  performing  whatever  service  might  be  required  of 
them  as  carriers.  They  did  not  delegate  one  part  of  their 
business  to  a  sleeping-car  company,  and  another  part  to 
an  express  company.  The  English  freight  service  does  a 
great  deal  of  business  which  in  America  would  go  by  ex¬ 
press.  The  railroads  themselves  do  the  work  of  collection 
and  delivery  ;  and,  in  the  cities  at  any  rate,  it  is  done  with 
great  promptitude.  Goods  received  by  the  companies  at 
Liverpool  in  the  afternoon,  and  destined  for  London,  are 
forwarded  the  same  night,  and  delivered  at  the  door  of 
the  consignee  on  the  morning  following.  The  force  em¬ 
ployed  by  the  railroad  companies  for  cartage  is  enormous  ; 


1  See  J.  Francis  :  “  History  of  the  English  Railway,”  London,  1851. 


150  RAILROAD  TRANSPORTATION. 

its  organization,  for  collection  as  well  as  delivery,  is 
thorough ;  and  the  terminal  expenses  due  to  this  work 
form  a  main  item  in  the  freight  charges  for  the  higher 
classes  of  goods. 

Thus  the  English  system  is  free  from  most  of  the  abuses 
which  have  arisen  in  America  in  connection  with  subsidiary 
corporations,  whether  for  express  service,  car  service,  or 
terminal  facilities. 

On  the  other  hand,  when  English  railroads  were  first 
chartered,  the  shippers  desired  and  expected  to  furnish 
their  own  cars.  In  the  low-class  freight  traffic  they  have 
generally  done  so.  It  is  characteristic  of  English  con¬ 
servatism  that  this  custom  has  been  retained  so  long.  It 
is  inconvenient  to  both  railroads  and  shippers.  The  ship¬ 
pers  complain  of  damage  and  detention  of  cars ;  the  rail¬ 
roads  complain  of  waste  of  space  and  power.  Both 
parties  have  good  ground  for  their  complaints.1  Besides 
these  more  serious  evils,  the  custom  gives  to  English 
freight  trains  a  disreputable  appearance  which  contrasts 
almost  ludicrously  with  the  solid  excellence  of  the  line 
and  buildings.  An  uninstructed  observer  might  readily 
suppose  that  the  companies  had  spent  all  their  money  on 
the  permanent  way,  and,  having  nothing  left  for  equipment, 
were  tottering  on  the  verge  of  hopeless  bankruptcy.  Yet 
such  is  the  inertia  of  English  business  habits,  that,  except 
in  the  Northeast,  the  efforts  of  the  railroads  have  been 
powerless  to  overcome  it. 

3.  Relatio?is  of  Railroads  to  one  another . — The  stability 
of  English  business  has  made  it  possible  to  bring  railroad 
competition  under  control.  It  was  said  by  a  member  of 
Parliament  in  1872:  “  I  do  not  think  that  there  is  at  this 
moment  a  competitive  rate  existing  in  the  kingdom.”  As 


1  Gustav  Cohn  :  “  Englische  Eisenbahnpolitik,”  ii.,  1 12-120. 


THE  ENGLISH  RAILROAD  SYSTEM.  I  5  I 

regards  direct  competition  between  parallel  lines  of  rail¬ 
road,  the  statement  was  not  far  from  the  truth. 

A  railroad  in  England  can  calculate  its  probable  busi-  * 
ness  in  advance.  So  also  if  one  railway  builds  a  branch 
to  compete  with  another  for  traffic  of  which  the  latter  has 
hitherto  had  a  monopoly,  it  can  guess  with  some  degree 
of  accuracy  what  share  of  the  traffic  it  is  likely  to  control. 
The  competition,  as  long  as  it  exists,  is  less  speculative. 
And,  at  any  rate,  one  railroad  war  will  generally  settle  the 
matter.  With  us  a  railroad  war  settles  nothing.  A  truce 
is  patched  up  for  a  time ;  but  after  a  few  years,  or  even 
months,  pass,  the  conditions  of  traffic  are  so  changed  that 
the  roads  must  fight  it  out  over  again.  But  in  England 
the  relative  strength  is  settled  once  for  all.  A  division  of 
traffic  which  is  right  now  is  likely  to  be  right  ten  years 
hence.  There  is  no  probability  that  new  connections  will  be 
built  or  new  districts  developed  in  such  a  way  as  to  seriously 
alter  the  relative  strength  of  the  competing  parties.  Still 
less  likely  is  it  that  completely  new  through-lines  will  be 
built  to  contend  for  their  share  in  a  new  division.  There 
has  been  no  important  case  of  the  kind  for  more  than 
thirty  years. 

A  division  of  traffic  for  fourteen  years  or  more  has  not 
been  infrequent  in  England.  In  most  parts  of  America,  it 
would  be  impossible.  Our  traffic  agreements  have  to  pro¬ 
vide  for  constant  revision  of  percentages ;  each  revision  - 
offers  the  opportunity  for  a  new  quarrel.  Arrangements 
of  long  standing,  like  the  Chicago-Omaha  pool,  may  be 
completely  unsettled  by  a  new  system  of  connecting  lines. 
Steady  maintenance  of  schedule  rates  is  equally  impossi¬ 
ble.  Competition  in  America  is  only  held  in  abeyance 
for  short  periods.  In  England  it  is  really  brought  under 
control. 


152 


RAILROAD  TRANSPORTATION . 


4.  Railroads  and  Legislation. — All  these  facts  have  an 
important  bearing  on  the  position  of  the  railroads  before 
the  law.  It  may  fairly  be  said  that  the  railroads  and 
the  public  are  more  independent  of  one  another  in  Eng¬ 
land  than  in  America  \  not  because  there  is  less  conflict, 
but  because  the  community  feels  the  results  of  any  such 

conflict  less  in  England  than  with  us. 

In  the  first  place,  the  English  companies  have  less  to 
fear  from  sudden  changes  in  legislation,  or  sudden  move¬ 
ments  of  public  opinion.  They  can  behave  in  an  exas¬ 
perating  manner  without  endangering  any  of  their  well- 
recognized  rights.  Such  impudence  as  was  displayed  by 
the  companies  in  the  face  of  the  early  decisions  of  the 
Railway  Commissioners  would  be  all  but  impossible  in 
America.  An  American  road  which  should  thus  openly 
defy  a  regularly  constituted  public  authority  would  raise 
a  wave  of  public  sentiment  against  it,  which  would  over¬ 
bear  all  vested  rights  and  privileges.  There  is  always 
danger  of  a  kind  of  public  lynch  law.  In  order  to  disobey 
the  law  in  America,  it  would  be  necessary  to  make  a  show 
of  complying  with  it.  But  in  the  majority  of  cases  it  may 
fairly  be  said  that  honestly  managed  American  corpora¬ 
tions  have  really  tried  to  Conform  to  the  requirements  of 
commissioners,  even  before  the  courts  have  taken  the 
steps  to  render  such  compliance  necessary.  This  has  not 
been  the  case  in  England.1 

Even  when  a  law  regulating  charges  is  enforced,  it 
affects  railroad  earnings  in  England  much  less  seriously 
than  in  America.  If  competition  is  done  away  with,  you 
can  apply  almost  any  scheme  you  please  with  compara- 

1  For  a  striking  instance,  take  the  conduct  of  the  Great  North  of  Scotland 
in  the  Aberdeen  manure  case.  Evidence  before  the  Select  Committee  on 
Railways,  1881,  qu.  639,  4687.  Compare  the  refusal  of  the  L.  &  N.  W.  to 
act  as  carriers  of  coal,  qu.  2993. 


THE  ENGLISH  RAILROAD  SYSTEM.  1 53 

tively  little  harm  ;  if  competition  is  active,  you  cannot 
with  justice  or  success  do  what  will  cripple  one  competitor 
against  another.  In  America  we  have  to  deal  with  rail 
and  water  competition  both.  In  England  water  competi¬ 
tion  still  exists,  and  seriously  interferes  with  some  of  the 
schemes  of  regulation  ;  but  as  far  as  a  railroad  competition, 
pure  and  simple,  is  concerned,  the  authorities  have  the 
field  almost  clear,  and  can  arrange  matters  to  suit  their 
own  notions  of  vested  rights.  Decisions  which  would 
create  a  panic  in  America  scarcely  call  forth '  a  public 
protest  in  England. 

But  the  effect  is  not  all  one-sided.  These  facts  cut  both 
ways.  They  make  the  public  authorities  in  America  more 
powerful,  but  less  independent.  If  legislation  is  to  have 
such  a  serious  effect  it  must  be  framed  with  the  utmost  care, 
or  it  will  react  against  the  men  who  designed  it.  The  very 
weakness  of  American  railroads  is  thus  a  source  of  strength. 

Any  legislation  which  seriously  affects  railroad  profits 
will  check  the  increase  of  railroad  facilities.  Such  increase 
of  facilities  is  essential  to  the  development  of  any  growing 
American  community.  If  such  a  community  passes  laws 
hostile  to  the  railroad  interest,  it  soon  feels  the  evil  effects. 
The  Potter  law  in  Wisconsin 1  is  an  instance  in  point.  The 
reduction  in  charges  caused  a  reduction  in  profits  ;  this 
stopped  the  growth  of  railroads  ;  the  growth  of  the  com¬ 
munity  was  thereby  brought  almost  to  a  standstill.  The 
very  interests  which  were  most  clamorous  for  the  law  in 
1874  were  most  clamorous  for  its  repeal  in  1876.  The 
English  public  is  not  affected  by  restraints  of  this  kind, 
because  the  English  railroad  system  is  so  fully  developed 
that  its  extension  is  not  a  matter  of  vital  concern  to  the 
business  interests  of  the  nation. 


1  See  p.  135. 


i-54 


RAILROAD  TRANSPORTATION. 


To  sum  up :  England  can  afford  to  make  a  great  many 
laws  which  America  cannot,  for  three  reasons  :  First,  the 
English  railroads  have  more  power  to  resist  the  enforce¬ 
ment  of  laws  which  injure  them.  Second,  even  when  the 
laws  are  enforced  their  profits  are  not  so  much  affected. 
Third,  the  business  interests  of  England  are  not  dependent 
upon  increased  railroad  facilities,  nor  obliged  to  encourage 
new  railroad  construction. 

The  following  table  1  will  give  some  idea  of  the  extent 
and  financial  condition  of  the  English  railroad  system  in 
the  year  1883  : 

Great  Britain  United 

and  Ireland.  States. 


Mileage 

Capital  (and  debt) 
Per  mile 
Gross  earnings 
Per  mile 

Operating  expenses 
Per  cent,  of  earnings 
Net  earnings 
Per  mile 

Per  cent,  of  capital 


.  .  18,681 

.  $3,815,000,000 
.  .  204,500 

345,000,000 
.  .  18,500 

.  182,000,000 

53 

.  163,000,000 

8,750 
4.29 


110,414 
$7,478,000,000 
61,800  2 3 
824,000,000 
7,500 
531,000,000 
64f 

293,000,000 

2,650 

3-92 


The  United  Kingdom  possesses  about  one  mile  of  rail¬ 
road  to  every  six  and  one  half  miles  of  territory ;  a  little 
less  than  the  proportion  prevailing  in  the  States  of  Penn¬ 
sylvania,  Ohio,  Indiana,  or  Illinois.  But  if  England  alone 
be  considered,  apart  from  Scotland  and  Ireland,  the  pro¬ 
portion  is  of  course  much  greater — nearly  the  same  as  in 
Massachusetts. 

The  cost  per  mile  is  remarkably  high,  not  merely  in 
comparison  with  the  United  States,  but  with  other  Euro- 

1  The  English  figures  are  from  the  “Board  of  Trade  Returns”;  the 

American  figures  are  based  on  those  of  Poor’s  “  Manual.” 

3  This  figure  is  based  on  the  total  mileage  return  ;  the  others  on  the  return 
of  miles  in  operation.  Hence  the  apparent  discrepancy. 


THE  ENGLISH  RAILROAD  SYSTEM . 


155 


pean  countries,  the  average  for  the  whole  of  Europe  being 
only  about  $115,000  per  mile.  In  the  first  place,  the 
original  investments  of  capital  were  made  with  a  thor¬ 
oughness  and  lavishness  not  tempered  by  any  regard  to 
the  immediate  wants  of  trade — the  same  lavishness  which 
proved  so  unfortunate  in  the  case  of  the  Grand  Trunk 
Railway  of  Canada,  and  which  English  builders  have 
until  recently  insisted  upon  manifesting  all  over  the  world. 
Secondly,  there  have  been  large  additions  to  the  capital 
account  in  recent  years.  The  cost  per  mile  of  lines  open 
in  1863  was £32,804,  or  $160,000.  It  increased  slowly  until 
1872,  when  it  was  £36,000,  or  $176,000.  Then  began  a 
period  of  rapid  increase  ;  in  1874  it  reached  ,£37,000,  in  1876 
£“39,000,  in  1878  £40,000,  in  1881  £41,000,  in  1883  £42,000. 
The  cost  per  mile  of  British  railroads  at  the  end  of  the  year 
1883  showed  an  increase  of  16  per  cent,  in  eleven  years. 

To  be  sure,  the  United  States  cost  per  mile,  running  up 
from  $50,000  to  $62,000,  shows  an  even  greater  percentage 
of  increase — a  great  deal  of  it  mere  water.  But  it  is  not 
half  as  great  an  actual  increase  for  each  mile ;  and  we 
almost  certainly  have  more  to  show  for  it  in  the  way  of 
improvement  of  road  and  equipment.  There  was  in  the 
United  States  a  great  deal  more  room  for  such  improve¬ 
ment,  and  necessity  for  new  capital  expenditure  on  roads 
which  had  been  at  first  badly  built  and  lightly  equipped. 

It  is  impossible  to  avoid  a  suspicion,  which  the  secrecy 
of  English  railroad  accounts  prevents  us  from  proving  or 
disproving,  that  certain  leading  English  railway  companies 
have  been  in  past  years  paying  dividends  out  of  capital ; 
dividing  as  large  a  proportion  of  the  gross  earnings  as 
possible,  swelling  the  construction  account  unfairly,  and 
borrowing  money  for  expenses  which  should  have  been 
paid  out  of  revenue. 


156  RAILROAD  TRANSPORTATION. 

The  worst  form  of  stock-watering,  unhappily  so  com¬ 
mon  in  America,  by  which  the  construction  account  is 
loaded  down,  not  with  capital  borrowed  for  investment, 
but  with  purely  fictitious  capital,  representing  no  actual 
investment  whatever,  is  practically  unknown  in  England. 
There  is  no  temptation  for  an  honestly  managed  road  to 
water  its  stock  in  this  way,  because  there  is  no  legal  limi¬ 
tation  of  dividend.  The  attempt  to  do  it  with  dishonest 
purposes  would  be  not  merely  unsuccessful,  but  dangerous 
to  those  who  should'undertake  it. 

From  the  load  of  bonded  debt  with  which  our  railroads 
are  burdened,  the  English  companies  are,  to  a  considerable 
extent,  free.  The  issue  of  such  obligations  has  been 
practically  limited  to  one  third  of  the  paid-up  capital.1 
It  thus  happens  that  while  the  proportion  of  net 
earnings  to  capital  is  essentially  the  same  in  the  two 
countries,  the  English  dividend  average  is  much  higher 
and  steadier. 

When  it  comes  to  a  comparison,  not  of  earnings,  but  of 
rates  and  services,  the  matter  is  much  more  difficult.  It 
is  almost  impossible  to  compare  the  amount  of  work 
done,  or  the  cost  of  doing  a  given  amount  of  work. 
Train-mile  figures  we  have  in  abundance  ;  but  as  long  as 
we  do  not  know  the  average  weight  of  freight  or  number 
of  passengers  carried,  we  cannot  even  guess  at  what  these 
figures  indicate  concerning  matters  of  public  service.  The 
English  companies  do  not  furnish  or  even  compile  ton- 
mileage  statistics.  This  is  no  mere  accident  of  practice ; 
it  is  characteristic  of  the  principle  on  which  English  rail¬ 
ways  are  managed.  There  is  a  fundamental  difference  of 

1  Instead  of  the  distinction  between  stock  and  bonds,  the  English  railroad 
capital  is  divided  into  ordinary,  preference,  guaranteed,  and  debenture 
stocks,  forming,  respectively,  37*  2^>  I2»  an(l  25  Per  cent,  of  the  whole.  The 

debentures  correspond  most  nearly  to  bonds  in  their  character. 


THE  ENGLISH  RAILROAD  SYSTEM. 


157 


purpose  between  train-mile  and  ton-mile  statistics.  The 
train-mile  is,  in  a  rough  way,  the  unit  of  railroad  service — 
so  much  work  done  by  the  railroad.  The  ton-mile  (or 
passenger-mile)  is,  in  the  same  rough  way,  the  unit  of 
public  service — work  done  for  the  public.  Now,  the  whole 
theory  of  the  English  railroad  system  starts  from  the 
principle  that  railroads  are  to  be  managed  as  business 
enterprises,  not  as  matters  of  public  service;  hence,  their 
impatient  rejection  of  the  idea  that  they  should  compile 
a  set  of  statistics  arranged  from  an  outside  point  of  view, 
with  but  little  inside  interest. 

We  thus  actually  have  no  figures  which  we  can  compare 
in  the  aggregate.  A  comparison  of  charges  in  detail  is 
almost  equally  difficult,  owing  to  differences  in  the  kind 
of  service  rendered  in  the  two  countries,  and  to  the  multi¬ 
tude  of  special  rates.  In  general,  it  may  be  said  that 
passenger  rates  are  lower  in  England,  low-class  freight 
rates  higher ;  and  that  for  the  charges  on  the  more  valu¬ 
able  freight,  no  comparison  between  the  two  countries  is 
practicable. 

The  passenger  traffic  in  its  three  classes  is  conducted  at 
prevailing  rates  of  four,  three,  and  two  cents  per  mile 
respectively.  Practically,  the  bulk  of  the  traffic  is  done  at 
a  two-cent  rate.  The  change  in  this  respect  in  the  last 
fifteen  years  is  quite  noticeable.  Fifteen  years  ago  the 
fast  trains  did  not  generally  carry  third-class  passengers ; 
now  they  almost  always  do.  At  the  same  time  the  com¬ 
fort  of  the  third-class  carriages  has  been  greatly  increased. 
The  result  has  been  an  enormous  development  of  third- 
class  travel.  Comparing  the  figures  of  1880  with  those  of 
1870,  we  find  that  the  number  of  third-class  passengers 
carried  had  much  more  than  doubled,  while  the  first-class 
had  increased  but  slightly,  and  the  second  had  diminished 


1 5  8  RAILROAD  TRANSPOR  TA  TION. 

considerably.  In  the  year  1880,  out  of  the  immense 
total  of  541  millions  of  passengers  carried  in  England  alone 
(more  than  double  the  American  figures  for  the  same 
year),  five  sixths  were  third-class  j  so  that  the  third-class 
traffic  produced  more  than  twice  the  gross  revenue  of  the 
two  other  classes  combined.  There  is,  therefore,  but 
slight  error  in  regarding  two  cents  per  mile  as  the  normal 
passenger  rate  in  England,  while  that  in  America  is  nearly 
2.35  cents  per  mile,  although  the  average  American  pas¬ 
senger  journey  is  three  or  four  times  as  long  as  in 
England. 

Any  attempt  at  comparison  of  freight  charges  would  be 
long,  technical,  and  unsatisfactory.  On  high-class  freight 
it  is  altogether  impossible,  because  the  English  rates  for 
such  goods  include  collection  and  delivery.  No  one  can 
tell  how  much  we  should  allow  for  cartage,  or  whether  we 
should  take  American  freight  rates  or  express  rates  as  our 
standard  of  comparison.  An  extremely  rough  estimate, 
not  making  allowance  for  any  of  the  disadvantages  to 
which  English  railroads  are  subject,  would  indicate  that 
their  charges  per  ton-mile  on  all  traffic  average  are  from 
fifty  to  seventy-five  per  cent,  higher  than  ours. 

The  means  of  handling  this  traffic  are  in  some  respects 
fat|  better  than  those  in  the  United  States.  Especially  is 
tjiis  true  as  regards  organization. 

In  the  first  place,  the  lines  of  consolidation  have  become 
so  definitely  settled  that  we  can  speak  of  the  English  rail¬ 
road  system  as  something  in  a  certain  sense  complete. 
The  lines  of  railroad  construction  were  for  the  most  part 
laid  down  it  1845.  The  railroad  mania  of  that  year  was 
never  repeated.  Ten  years  more  indicated  the  forms  of 

1  The  same  proportion  has  since  held  good.  The  figures  for  the  United 
Kingdom  for  1S83  were  :  Class  I.,  36,000,000 ;  Class  II.,  66,000,000  ;  Class 
III.,  53i  ,000,000. 


THE  ENGLISH  RAILROAD  SYSTEM. 


!59 


arrangement  or  consolidation.  Another  ten  years  indi¬ 
cated  the  details.  Since  that  time  there  has  been  a  period 
of  comparative  quiet.  The  consolidation  has  taken  place, 
not  on  parallel  lines,  but  on  radiating  ones.  Besides  three 
northern  companies,  there  are  nine  systems  radiating  from 
London  as  a  centre.  This  arrangement  increase^  the  com¬ 
mon  interests  and  lessens  the  conflicting  ones. 

V/  Secondly,  the  agreements  between  rival  routes  have 
been  so  permanent  that  they  are  sometimes  no  longer  felt 
as  a  restraint,  so  thoroughly  has  traffic  adapted  itself  to 
their  conditions.  This  is  the  case  with  many  pooling 
arrangements.  The  early  history  of  English  railway  pools 
is  obscure.  They  first  assumed  importance  some  thirty 
years  ago.  The  London  and  Northwestern  seems  to 
have  taken  the  lead  in  this  policy  ;  its  great  rival,  the 
Midland,  while  maintaining  rates,  has  been  less  inclined  to 
divide  traffic.  English  railroads  have  had  great  advantages 
over  ours  in  enforcing  these  agreements.  The  courts  have 
looked  upon  them  with  less  disfavor,  and  statesmen  with 
much  more  favor  than  has  been  the  case  in  the  United 
States.1  At  present  they  seem  to  be  losing  some  of  their 
importance ;  not  because  they  are  powerless,  but,  as 
already  indicated,  because  traffic  has  become  so  stable  that 
they  are  less  necessary  than  they  were. 

Third,  in  place  of  our  joint  executive  committee,  they 
have  the  far ‘more  efficient  and  highly  organized  Railway 
Clearing-House.2 3  This  is  not  a  judicial,  nor,  in  the  ordinary 
sense  of  the  word,  an  executive  body.  It  decides  no  dis¬ 
puted  questions ;  it  makes  no  rates,  It  is  an  incorporated 

1  One  of  the  most  important  agreements  of  this  kind  is  said  to  have  been 

arranged  by  Mr.  Gladstone  himself. 

3  The  best  account  of  the  workings  of  the  English  Railway  Clearing-House 
is  to  be  found  in  the  evidence  before  the  Joint  Select  Committee  of  1872, 
Appendix,  pp.  839-945. 


l6o  RAILROAD  TRANSPORTATION. 

body ;  but  this  is  only  to  give  greater  responsibility  to  its 
work.  It  is  simply  a  highly  organized  machine  for  keeping 
and  settling  traffic  accounts.  It  does  the  work  of  our  fast- 
freight  lines  plus  a  great  deal  more. 

One  part  of  its  work  corresponds  exactly  to  that  of 
our  fast-freight  lines— namely,  the  superintendence  of 
car-mileage  accounts.  But  it  can  do  that  work  better 
than  an  American  line  or  car  clearing-house,  because  it 
has  at  every  junction  employees  of  its  own,  “  number- 
men,”  to  check  and  report  the  car  movement.  It  is 
not,  therefore,  obliged  to  depend  solely  upon  reports 
furnished  by  the  companies  themselves. 

Its  much  more  important  department  of  work  is  to 
settle  the  receipts  of  different  companies  from  through 
freight  by  accounts  and  balances,  instead  of  by  actual  col¬ 
lection  in  every  instance.  It  was  with  this  purpose  that 
it  was  organized  in  1842.  It  grew  slowly  till  1850,  then 
rapidly,  and  has  for  many  years  included  practically  all  the 
railroads  in  England.1 

It  is  governed  by  a  committee  consisting  of  one  dele¬ 
gate  from  each  railroad.  A  two-thirds  majority  is  required 
for  action.  Its  permanent  officers  are  a  secretary  and  a 
treasurer.  The  accounts  are  made  up,  not  between  each 
company  and  the  clearing-house  as  a  whole,  but  between 
each  separate  group  of  two  or  more  companies.  There 
are  two  reasons  for  this — first,  in  order  that  a  special  disa¬ 
greement  between  two  companies  may  not  interfere  with 
the  whole  system  of  accounts,  and  second,  in  order  that 
special  expenses  may  be  charged  where  they  belong. 

For  instance,  in  the  matter  of  classification:  there  is  a 

1  The  clerical  force  employed  is  over  2,000  ;  the  number  of  transactions 
settled  is  7,000,000  annually,  with  an  aggregate  value  of  well  on  toward 
$100,000,000.  The  car-mileage  settlements  amount  to  500,000,000  miles. 
F.  S.  Williams,  “  Our  Iron  Roads,”  3d  ed.,  London,  1884,  pp.  3I3»  3!4* 


THE  ENGLISH  RAILROAD  SYSTEM. 


161 


'Ni  system  generally  adopted  throughout  England  known  as 
the  Clearing-House  classification.  It  has  been  formed  by 
the  Clearing-House,  and  is  but  slightly  changed  from  year 
to  year.  Each  railroad  had  originally  quite  a  different 
classification  of  its  own,  but  they  have  all  found  it  conven¬ 
ient  to  adopt  this  general  system.  But  there  are  certain 
districts  where  a  different  classification  is  found  more 
available,  and  this  difference  may  affect  the  billing  of  the 
through  business.  Unless  the  companies  handling  such 
consignments  object,  the  Clearing-House  does  not ;  it  only 
makes  an  extra  charge  for  the  greater  trouble  in  making 
up  the  accounts.  So  of  special  rates :  any  two  or  more 
companies  are  at  liberty  to  make  what  rates  they  please 
and  divide  them  as  they  please,  and  the  Clearing-House 
will  carry  out  their  wishes.  But  if  one  company  makes  a 
through  rate  and  another  company  is  dissatisfied  with  its 
portion  of  that  through  rate,  and  insists  upon  charging  its 
own  local  rate — which  it  has  a  right  to  do  when  there  is 
no  agreement  to  the  contrary — the  Clearing-House  takes 
no  responsibility  in  the  premises.  It  simply  leaves  that 
account  open  till  the  matter  is  settled.1 

1  The  general  method  of  operation  is  as  follows  :  Cars  carrying  any 
considerable  amount  of  through  freight  may  all  pass  from  one  railway  to* 
another  without  transshipment.  No  “  paid-ons  ”  are  collected  by  one 
company  from  another.  The  way-bill,  an  abstract  of  which  is  sent  to  the 
Clearing-House,  furnishes  a  claim  which  is  as  good  as  the  money.  Only  in 
case  of  undercharge  the  road  collects  the  deficiency. 

The  gross  sum  received  for  a  consignment  of  freight,  whether  paid  by 
the  sender  or  the  consignee,  is  debited  to  the  road  that  collects  the  money. 
The  credits  for  this  sum  are  distributed  among  the  different  companies  as 
follows  :  First  a  fixed  sum  of  is.  6d.  per  ton  is  set  apart  for  station  expen¬ 
ses  at  each  end  (except  in  the  lowest  class  of  traffic,  which  pays  half  this 
amount).  Then  in  the  case  of  all  carted  goods  an  arbitrary  credit  is  made  at 
each  end  for  expenses  of  collection  and  delivery — 7s.  per  ton  in  London,  2s. 
6d.  in  other  places.  This  is  unfair  in  a  great  many  instances,  but  it  is 
claimed  that  the  inequalities  balance  eaeh  other  for  the  whole  work  of  a 


162 


RAILROAD  TRANSPORTATION. 


The  Clearing-House  is  an  institution  of  unquestionable 
benefit  to  all  parties  concerned — railroads  and  shippers 
alike.  Similar  experiments  are  being  tried  in  various 
parts  of  continental  Europe,  with- a  fair  measure  of  suc¬ 
cess.  The  Southern  Railway  and  Steamship  Association 
does  the  same  sort  of  work — though  less  completely  in 
our  own  country.  But  all  attempts  to  apply  a  general 
system  of  the  same  sort  throughout  the  United  States, 
have  been  brought  face  to  face  with  such  difficulties  that 
they  have  never  been  put  into  actual  practice.  Neverthe¬ 
less  the  possibility  of  finally  establishing  some  such 
system  is  constantly  in  the  minds  of  many  of  our  most 
thoughtful  railroad  men.  It  is  not  impossible  that  the 
right  sort  of  a  national  railroad  commission  might  do 
much  toward  securing  the  establishment  of  a  clearing¬ 
house  ;  and  it  is  certain  that  the  right  sort  of  a  clearing¬ 
house,  once  well  established,  would  do  much  towaid 
making  the  work  of  a  national  commission  easier  and 

more  effective. _ _ _ _ 

railway  company.  The  sum  remaining  after  these  deductions  for  terminals 
is  pro-rated  among  the  roads  over  which  the  goods  have  been  carried,  usually 
upon  the  basis  of  miles  actually  traversed.  But  a  company  cannot,  m 
general,  claim  credit  for  more  than  its  shortest  possible  route  between  the 
points  where  the  goods  entered  and  left  its  lines.  And  on  the  other  hand 
constructive  mileage  agreements  are  not  uncommon.  In  fact,  any  two  or 
more  roads  may  make  any  sort  of  agreements  they  please  about  through 
traffic,  or  may  even  for  the  time  being  “  agree  to  disagree,”  and  the  Clearing- 
House  will  not  interfere  ;  it  will  hardly  consent  to  arbitrate  when  requested 
to-do  so  by  both  parties.  Its  arbitration  committees  are  for  quite  another 
purpose-not  to  make  rules,  but  to  decide  questions  of  liability  under  existing 
rules.  The  separate  roads  must  make  their  own  agreements.  But  all  extra 
expenses  to  the  Clearing-House  in  these  agreements  or  disagreements  axe 
carefully  charged  to  the  companies  in  question. 


CHAPTER  IX. 


.  ENGLISH  RAILROAD  LEGISLATION. 

The  early  charters — Competition  and  combination — Acts  of  1854  and  1873 
— Work  of  the  Railway  Commissioners — Want  of  jurisdiction — Lack  of 
power  to  enforce  decrees — Principles  applied  in  the  regulation  of  rates 
— Charter  maxima  and  station  terminals — Differential  rates — Personal 
discriminations  forbidden — Questions  concerning  local  discriminations 
— Efforts  of  the  Railway  Commissioners  to  base  rates  upon  cost  of  ser¬ 
vice — Results  of  the  investigation  of  1881-82. 

Report  from  the  Select  Committee  on  Railways  :  Minutes  of  Evidence, 
and  Appendix.  1881  and  1882. 1 

Gustav  Cohn  :  “  Untersuchungen  iiber  die  Englische  Eisenbahnpolitik.” 
Vol.  i :  “  Die  Entwickelungder  Eisenbahngesetzgebung  in  England.”  Vol. 
ii :  “  Zur  Beurtheilung  der  Englischen  Eisenbahnpolitik.”  Vol.  iii :  “  Die 
Englische  Eisenbahnpolitik  der  letzten  zehn  Jahre.”  Leipzig  :  1874,  1875, 
1883.* 

The  history  of  the  general  questions  of  railroad  policy 
and  legislation  may  be  pretty  sharply  divided  into  two 
periods.  Railroad  construction  formed  the  subject  of  dis¬ 
cussion  and  action  in  the  first  period,  railroad  combination 
in  the  second.  The  dividing  line  between  the  two  periods 
falls  in  the  years  1845-48. 

1  Equally  good  in  its  day — in  some  respects  even  better — was  the  evidence 
collected  by  the  Royal  Commission  of  1865-1867.  The  investigations  of  the 
Joint  Select  Committee  of  1872  were  less  thorough,  though  their  report  was 
an  able  document.  The  work  of  the  Committee  of  1853,  good  in  its  time, 
is  too  old  to  have  much  present  interest. 

a  An  admirable  book — probably  the  most  careful  investigation  of  railroad 
problems,  from  the  standpoint  of  political  science,  which  has  anywhere  been 
made.  Its  value  must  be  admitted  even  by  those  who  differ  from  many  of 
its  conclusions. 


163 


RAILROAD  TRANSPORTATION. 


>  164 

The  first  railroad  charters  were  in  almost  all  respects 
modelled  upon  canal  charters.  Of  such  models  there  was 
an  abundance.  England  s  system  of  internal  navigation 
was  far  beyond  that  of  any  other  country  in  completeness. 
It  is  said  in  a  recent  parliamentary  paper  that  three  fifths 
of  the  railway  stations  in  the  United  Kingdom  are  sub¬ 
ject  to  water  competition.  It  was  the  strength  of  this 
canal  interest  that  formed  the  chief  obstacle  with  which 
the  promoters  of  the  earliest  railroads  had  to  contend. 
The  canals  had  a  monopoly,  and  they  were  naturally  un¬ 
willing  to  let  it  go.  But  they  carried  their  monopoly 
power  too  far.  Had  they  simply  attempted  to  obstruct 
the  railways,  they  might  have  delayed  their  constrnction 
for  years.  But  they  squeezed  the  public  too  hard  at  the 
same  time  j  and  this  extortion  created  a  sentiment  against 
the  canals,  which  enabled  a  railway  charter  of  importance 
to  slip  through  in  the  year  1826.  This  was  for  the  rail¬ 
way  between  Liverpool  and  Manchester.  There  were  two 
canals  connecting  these  cities  ;  they  had  a  monopoly  of 
the  available  water  supply,  and  therefore  feared  no  further 
canal  competition.  They  acted  in  harmony,  charged 
what  rates  they  pleased,  and  made  annually  cent,  per 
cent,  on  the  capital  invested  in  them.  They  could  afford 
to  oppose  the  railway.1  It  needed  a  politician  like  Huskis- 
son  to  carry  the  charter  through  in  the  face  of  such  ob¬ 
stacles ;  and  he  had  to  spend  $350,000  to  do  it.  But  the 
victory  was  won,  once  for  all.  No  sooner  was  the  Liver¬ 
pool  and  Manchester  line  opened  than  the  public  enthusi¬ 
asm  in  its  behalf  was  so  strong  that  the  canal  interests 
were  unable  to  make  a  similar  fight  against  other  roads 
proposed.  


1  By  a  curious  reversal  of  history,  the  railroads  between  Liverpool  and 
Manchester  are  now  engaged  in  opposing  a  ship  canal  which  threatens  to 
interfere  with  their  monopoly 


ENGLISH  RAILROAD  LEGISLATION.  1 65 

A  recent  writer  has  said  of  the  English  canals :  “  Ex¬ 
cessive  charges  and  monopoly  rates  were  as  to  them  un¬ 
known.”  The  facts  will  by  no  means  warrant  such  a 
statement.  The  evils  of  which  people  now  complain  as 
peculiar  to  railroads  had  already  shown  themselves  in  canal 
charges. 

It  was  at  first  supposed  that  a  railroad  would  be  used 
like  a  canal,  individuals  furnishing  their  own  cars  and 
motive  power.  The  clauses  in  the  charter  with  reference 
to  facilities  and  rates  were  drawn  up  with  this  idea. 
It  was  soon  seen  to  be  false.  Competition  between 
different  carriers  on  the  same  railroad  was  impossible. 
Could  competition  between  different  railroads  be  secured 
instead  ? 

It  is  to  the  credit  of  English  statesmen  that  they  did 
not  deceive  themselves  in  this  respect.  They  learned 
more  in  a  few  years  from  the  workings  of  a  few  miles  of 
railroad  than  the  general  public  has  learned  from  all  the 
railroads  of  the  world  in  half  a  century.  They  recognized 
that  competition  could  not  be  relied  upon  or  aimed  at 
with  any  hope  of  success.  As  early  as  1836  Mr.  Morrison 
of  Inverness  delivered  a  remarkable  speech,1  in  which  he 
made  the  points,  that  railroads  must  naturally  be  a  mon¬ 
opoly  ;  that  competing  roads  will  combine ;  that  parallel 
roads  are  a  waste  of  capital ;  and  that  fixed  maximum 
rates  are  useless.  These  were  good  principles;  but  they 
were  not  acted  upon.  There  were  not  men  enough  in 
Parliament  who  took  the  matter  really  to  heart.  There 
were  a  few  violent  anti-railroad  men,  a  few  energetic  rail¬ 
road  men,  and  a  great  body  of  men  who  vaguely  felt  that 
something  ought  to  be  done,  but  shrank  from  doing  any 
thing  in  particular.  Speeches  like  those  of  Mr.  Morrison 


1  Hansard :  3d  series,  vol.  33,  pp.  977-993. 


1 66  RAILROAD  TRANSPORTATION. 

were  unsatisfactory  to  extremists  of  both  sides,  and  did 
not  rouse  the  moderate  men  to  action.1 

In  the  years  1839-1845,  several  attempts  were  made  to 
secure  railroad  legislation,  Mr.  Gladstone  taking  an  active  ' 
part  in  these  matters.  Beyond  a  declaration  of  the  right 
to  revise  rates,  and  even  to  purchase  the  railroads  for 
State  management  in  the  remote  future,  nothing  was 
actually  accomplished.  It  is  needless  to  say  that  this  has 
remained  a  mere  declaration  and  nothing  more.  One  or 
two  experiments  in  the  way  of  railroad  commissions  made 
during  these  years  had  worse  than  no  result. 

Free  railroad  competition  was  meantime  being  tried  and 
found  wanting.  It  was  not  tried  on  purpose,  or  because 
Parliament  believed  in  the  principle.  It  was  because  so 
many  speculators  wanted  to  build  railroads,  and  Parlia¬ 
ment  had  not  the  moral  courage  to  refuse  them  charters. 

The  early  experience  of  England  was  different  from 
that  of  most  other  countries  in  this  respect,  that  people 
were  readier  then  than  afterward  to  invest  their  money  in 
railways.  The  question  of  subsidies  never  came  up,  be¬ 
cause  people  needed  to  be  discouraged  rather  than  encour¬ 
aged.  It  is  not  quite  true  to  say  that  England  was 
opposed  to  railroad  subsidies  on  principle,  for  in  Ireland, 

1  From  this  point  on,  the  views  advanced  in  this  chapter  are  so  different 
from  those  held  by  Mr.  Adams  (Railroads,  pp.  82—94)  that  a  word  of  ex¬ 
planation  is  necessary.  The  points  at  issue  are  in  large  measure  questions 
of  fact  rather  than  of  opinion.  At  the  time  when  IVIr.  Adams  wrote,  the  in¬ 
vestigation  of  1881—82  had  not  begun.  In  the  light  of  the  new  evidence 
then  brought  forward,  he  must  have  changed  his  opinion  on  many  points. 
On  the  other  hand,  at  the  time  when  he  wrote,  the  results  of  the  work  of  the 
Committee  of  1872  were  generally  overestimated  ;  and  he  had  not  the  means 
of  correcting  this  overestimate.  Finally— to  hazard  a  personal  opinion — Mr. 
Adams  is  too  active  and  rational  a  man  to  be  quite  ready  to  accept  some  of 
the  facts  of  modern  English  history.  He  insists  on  trying  to  find  intelligible 
theories  to  account  for  actions  which  were  simply  the  result  of  unthinking 
vis  inertia. 


ENGLISH  RAILROAD  LEGISLATION. 


1 67 


where  help  was  needed  by  the  railroads,  they  were  subsi¬ 
dized.  In  England  they  did  not  need  any  such  help,  and 
did  not  ask  for  it. 

For  the  time  being  the  competition  was  utterly  reckless. 
Up  to  the  end  of  1843  there  were  71  separate  roads  aver¬ 
aging  a  little  less  than  30  miles  in  length.  In  1844  they 
came  down  to  a  1 5-mile  average ;  and  in  the  four  years 
1844-47  there  were  chartered  637  separate  roads  with  a 
total  authorized  length  of  about  9,400  miles.  No  less 
than  eleven  projects  were  laid  before  Parliament  for  lines 
of  railway  through  a  single  valley  where  only  one  could 
possibly  go.  These  were  not  attempted  under  any  general 
railroad  law,  but  each  road  required  a  special  act  of  Par¬ 
liament.  What  was  more,  each  special  act  of  Parliament 
was  drawn  up  by  itself,  and  contained  hundreds  of  pro¬ 
visions,  mostly  useless  trash,  as  to  what  the  railroad  might 
do  under  all  conceivable  circumstances.  The  volume  of 
work  thus  created  threatened  to  take  up  the  whole  time 
of  Parliament  and  leave  no  room  for  other  business. 
They  tried  to  delegate  the  work  to  a  commission  ;  but  then 
they  insisted  on  reviewing  all  the  decisions  of  the  commis¬ 
sion  and  reversing  some  of  them,  so  that  there  was  no 
saving  here.  Some  relief  was  obtained  by  the  “  Clauses  Con¬ 
solidation  Act  ”  of  1 845 ,  which  prescribed  a  form  for  railway 
charters,  and  rendered  it  unnecessary  to  go  through  all  the 
350  separate  clauses  for  each  of  600  different  railways. 

was  obtained 

in  the  crisis  of  1,847,  which  cured  the  English  public  of  all 
belief  in  reckless  competition  in  railroad  building.  This 
crisis  was  much  more  distinctly  due  to  railroad  speculation 
than  any  other  ever  has  been,  not  even  excepting  the 
present  crisis  in  the  United  States,  with  which  it  has  many 
points  in  common.  It  was  a  hard  lesson ;  but  it  was 


But  the  first  real  relief  to  the  legislators 


1 68  RAILROAD  TRANSPORTATION. 

thoroughly  learned,  and  did  not  need  to  be  repeated.  It 
marked  the  transition  to  a  new  phase  of  railroad  policy ; 
the  transition  from  a  policy  of  competition  to  a  policy  of 
combination. 

Railroad  combinations  of  importance  may  be  said  to 
have  begun  in  1844;  at  any  rate,  they  then  first  attracted 
much  public  attention.  In  1845  the  Board  of  Trade  made 
a  report  to  Parliament  on  the  subject  of  amalgamation, 
taking  the  ground  that  it  was  right  for  continuous  but  not 
for  competing  lines.  In  1846  a  special  committee  of  Par¬ 
liament  considered  this  subject,  and  took  what  was  for 
that  time  advanced  ground.  Their  conclusions  were  that 
companies,  by  pooling  arrangements,  can  produce  all  the 
evils  of  amalgamation  with  none  of  its  advantages ;  that 
by  obtaining  concessions  from  the  companies  in  return  for 
allowing  them  to  amalgamate,  the  public  interest  can  best 
be  served ;  and  that  even  the  amalgamation  of  railways 
and  canals  may  be  allowable,  provided  the  railways  engage 
to  keep  the  canals  in  repair.  No  distinct  action  was  taken 
by  Parliament  on  this  report. 

Another  committee  on  the  same  subject  was  appointed 

j853  »  Cardwell  and  Gladstone  were  its  leading  men>- 
bers.  They  made  a  strong  effort  to  do  something,  but 
found  it  easier  to  explain  the  troubles  than  to  find  rem¬ 
edies.  They  hoped  to  encourage  “  running  powers  ”  by 
which  one  company  should  have  the  right  to  run  its  trains 
over  the  lines  of  other  companies.  Serious  obstacles  met 
them  in  the  attempt.  Nevertheless,  if  any  thing  at  all 
was  to  be  done,  it  must  be  done  in  this  way.  A  railroad 
which  had  a  London  connection  must  not  be  allowed  to 
freeze  out  one  which  had  no  such  connection ;  otherwise 
the  London  roads  could  compel  the  country  roads  to 
unite  with  them  on  their  own  terms.  This  was  the  one 


ENGLISH  RAILROAD  LEGISLATION.  1 69 

point  which  the  committee  seized  most  clearly ;  and  the 
bill  which  they  brought  in  and  which  became  a  law  under 
the  title  of  the  ‘‘Railway  and  Canal  Traffic  Act,  1854,” 
was  conceived  with  this  view — to  protect  the  local  roads 
in  their  through  business.  It  provided,  first,  that  every 
company  should  afford  proper  facilities  for  forwarding 
traffic ;  and,  second,  that  no  preferences  should  be  given. 

This  law  had  a  wide  and,  on  the  whole,  beneficial  effect. 
It  became  the  basis  for  numerous  decisions  on  the  subject 
of  railroad  rates ;  the  details  of  its  application  to  these  we 
shall  discuss  subsequently.  But  it  did  not  have  any 
appreciable  effect  in  preventing  amalgamation. 

From  1853  to  1872,  Parliament  suggested  a  great  many 
things,  and  accomplished  nothing.  Least  of  all  did  they 
check  the  tendency  of  the  roads  to  consolidate.  Much 
was  expected  of  the  Royal  Commission  of  1865-67.  But 
nothing  came  of  it.  They  collected  a  mass  of  valuable 
material,  and  wrote  a  tolerably  good  report ;  but  when 
they  came  to  draw  their  inferences,  they  could  only  say, 
in  general,  that  the  existing  state  of  things  seemed  likely 
to  continue,  and  that  they  saw  very  few  means  of 
helping  it. 

Another  committee  was  appointed  in  1872,  and  this 
time,  for  a  wonder,  something  was  actually  accomplished. 
In  principle  they  did  not  depart  from  the  lines  laid  down 
by  their  predecessors.  They  brought  forward  no  new 
views,  and,  in  one  sense,  no  new  laws.  They  simply  pro¬ 
vided  means  for  carrying  out  the  old  laws  and  the  old 
views.  The  outcome  of  their  work  was  an  act  for  carry¬ 
ing  into  effect  the  provisions  of  the  act  of  1854. 

The  act  of  1854  had  never  had  a  fair  chance.  The 
Committee  of  1853  originally  intended  that  questions 
under  it  should  be  decided  by  the  Board  of  Trade. 


]7°  RAILROAD  TRANSPORTATION. 

Through  the  influence  of  the  railways  this  had  been  so 
amended  in  the  House  that  such  questions  came  under 
the  jurisdiction  of  the  Court  of  Common  Pleas.  As  many 
of  these  questions  were  of  a  technical  character,  the  court 
declined  to  take  cognizance  of  many  things  which  Card- 
well  had  intended  should  come  within  the  scope  of  the  act. 
Here  was  a  real  difficulty.  The  Commission  of  1867  had 
made  a  feeble  effort  to  meet  it  ;  the  Committee  of  1872 
grappled  with  it  boldly.  They  recommended  the  appoint¬ 
ment  of  a  special  Railway  Commission,  provisionally  es¬ 
tablished  for  five  years,  to  take  cognizance  of  a  variety  of 
cases  under  the  act  of  1854,  whose  decisions  were  to  have 
a  judicial  force.  They  were  further  to  decide  many  cases 
where  the  interest  of  different  railways  conflicted.  It  was 
thought  that  before  such  a  commission  the  public  and 

the  railways  could  meet  on  even  terms.  Their  bill  was 
passed  in  1873. 

With  the  §pf  of  1873  the  general  railroad  legislation 
may  be  said  to  have  closed.  The  movements  which  the 
public  had  feared  for  thirty  years  had  now  pretty  much 
expended  their  force.  Amalgamations  which  were  confi¬ 
dently  expected  in  1872  did  not  take  place,  after  all. 
Joint-purse  arrangements  became  less  important  instead 
of  more  important,  because  railroads  found  that  they 
could  maintain  rates  without  them. 

It  is  not  exactly  true  to  say  that  “  in  Great  Britain  the 
discussion  of  the  railroad  problem  may  be  considered  as 
over  for  the  time  being/’  The  railroad  problem  has 
ceased  to  be  a  bugbear ;  but  it  has  become  all  the  more  a 
question  for  practical  discussion.  Vague  fears  with  regard 
to  the  growth  of  the  railway  power  have  given  place  to 
pointed  complaints  as  to  its  abuse  in  individual  instances. 
The  period  of  general  legislation  has  passed.  Mr.  Adams 


ENGLISH  RAILROAD  LEGISLATION. 

is  right  in  saying :  “  As  a  result  of  forty  years  of  experi¬ 
ment  and  agitation  Great  Britain  has  on  this  head  come 
back  very  nearly  to  its  point  of  commencement.”  He  is 
not  quite  right  in  adding :  “  It  has  settled  down  on  the 
doctrine  of  laissez  faired  It  might  better  be  said  that 
it  has  settled  down  on  the  policy  of  specifie  laws  for 
specific  troubles. 

The  idea  of  a  railway  commission  was  by  no  means  new. 
As  long  ago  as  184.0  it  was  felt  that  some  such  authority 
was  necessary.  In  that  year  powers  were  given  to  the 
Board  of  Trade  not  unlike  those  now  exercised  by  the 
Massachusetts  Railroad  Commission.  These  powers  were 
further  defined  in  1842.  The  Board  of  Trade  was  as  well 
adapted  to  the  work  as  any  body  then  existing.  It  had  for 
years  past  performed  similar  functions  in  connection  with 
shipping.  It  failed  where  the  Massachusetts  Commission 
succeeded,  not  because  of  a  difference  in  the  law,  but  be¬ 
cause  the  English  public  sentiment  with  regard  to  railroads 
was  not  sufficiently  active  to  give  such  a  body  the  neces¬ 
sary  moral  support  to  make  up  for  lack  of  legal  authority. 

In  1844  another  commission  was  appointed  with  more 
specific  powers.  Their  special  duty  was  to  make  prelimi¬ 
nary  reports  to  Parliament  on  applications  for  railroad  char¬ 
ters.  They  tried  to  do  their  work  well,  but  were  beset  by 
difficulties  on  all  sides.  Railroad  projectors  hated  them  ; 
Parliament  itself  was  jealous  of  them.  After  a  luckless 
existence  of  about  a  year,  this  board  was  abolished.  It 
really  died  of  too  much  work  and  too  little  pay.  In  1846 
Parliament  tried  the  experiment  of  a  railroad  commission 
of  another  kind.  It  offered  first-rate  salaries,  and  secured 
well-known  men  ;  then  it  avoided  all  causes  of  offence  by 
not  giving  them  any  powers.  This  lasted  five  years.  Its 
fate  was  the  reverse  of  that  of  its  predecessors ;  it  died  of 


1/2 


RAILROAD  TRANSPORTATION. 


too  much  pay  and  too  little  work.  Thus  ended  the  first 
series  of  experiments  in  railway  commissions. 

We  have  seen  what  were  the  events  which  led  to  the 
passage  of  the  Regulation  of  Railways  Act  in  1873.  The 
commission  appointed  under  that  act  was  to  consist  of 
three  members  ;  one  of  them  a  railroad  man,  one  a  lawyer. 
They  received  a  salary  of  .£3000  each.  They  were  to  decide 
all  questions  arising  under  the  act  of  1854  and  subsequent 
acts  connected  with  it.  They  were  further  empowered  to 
arbitrate  between  railroads  in  a  variety  of  cases ;  to  com¬ 
pel  companies  to  make  through  rates  which  should  conform 
to  the  intention  of  the  act  of  1854;  to  secure  publicity  of 
rates  ;  to  decide  what  constitutes  a  proper  terminal  charge ; 
and  some  other  less  important  matters.  On  questions  of 
fact  their  decision  was  to  be  final ;  on  questions  of  law  it 
was  subject  to  appeal.  The  Railway  Commissioners  them¬ 
selves  were  to  determine  what  were  questions  of  fact 
and  what  were  questions  of  law.  Subsequent  acts  have 
made  but  slight  changes  in  these  powers. 

The  commission  consisted  of  able  men — Sir  Frederick 
Peel,  Mr.  Price,  formerly  of  the  Midland  Railway,  and  Mr. 
Macnamara  ;  the  last-named  died  in  1877,  and  was  suc¬ 
ceeded  by  Mr.  A.  E.  Miller.  They  went  to  work  with 
energy,  and  in  a  spirit  which  promised  to  make  the  experi¬ 
ment  a  signal  success.  And  it  was  at  first  supposed  to  be 
such  a  success.  People  judged  by  the  reports  of  the  com¬ 
mission  itself.  And  they  were  the  more  prone  to  believe 
these  reports,  because  it  was  so  desirable  to  find  an  easy 
solution  of  perplexing  questions  of  railroad  policy.  Mr. 
Adams,  writing  in  1878,  said:  “The  mere  fact  that  the- 
tribunal  is  there,  that  a  machinery  does  exist  for  the 
prompt  and  final  decision  of  that  class  of  questions,  puts 
an  end  to  them.  They  no  longer  exist.”  That  repre- 


ENGLISH  RAILROAD  LEG/SLA  TION. 


i;  3 


sented  the  general  public  opinion  on  the  subject  at  the 
time  ;  it  represents  the  general  impression  in  America 
down  to  the  present  time. 

In  1878,  the  very  year  when  Mr.  Adams  wrote,  the 
original  term  of  the  commission  expired.  People  sup¬ 
posed  that  it  would  be  made  permanent.  Instead  of  that, 
the  renewals  have  been  for  much  shorter  periods,  leaving 
the  commissioners  a  precarious  tenure,  and  showing  dis¬ 
satisfaction  somewhere. 

A  parliamentary  investigation  on  railroad  rates  in  1881-2 
showed  the  grounds  of  dissatisfaction  only  too  clearly. 
The  testimony  revealed  a  state  of  things  almost  unsus¬ 
pected  by  the  general  public,  and  giving  an  entirely 
different  explanation  of  the  fact  that  the  commissioners 
had  so  few  cases  to  deal  with.  The  substance  is,  that  the 
power  of  the  commission  satisfies  nobody.  It  has  power 
enough  to  annoy  the  railroads,  and  not  power  enough  to 
help  the  public  efficiently. 

The  Railway  Commission  was  a  court.  Not  an  execu¬ 
tive  body,  but  to  all  intents  and  purposes  a  court  of  law. 
And  in  establishing  this  new  court,  in  addition  to  those 
already  existing,  Parliament  had  two  ends  in  view :  1. 
To  have  a  tribunal  which  would  and  could  act,  when  others 
would  or  could  not.  2.  To  avoid  the  expense,  delay,  and 
vexation  incident  to  litigation  under  the  old  system. 
Neither  end  was  well  fulfilled. 

1.  The  commission  could  not  act,  partly  from  want  of 
jurisdiction,  partly  from  want  of  executive  power.  Its 
jurisdiction  did  not  cover  by  any  means  the  whole  ground. 
The  provisions  about  terminals,  arbitration,  working 
agreements,  etc.,  amounted  to  very  little.  Its  real 
power  was  under  the  act  of  1854.  It  could  under  this 
act  require  companies  to  furnish  “  proper  facilities, ”  and 


174  RAILROAD  TRANSPORTATION . 

it  could  prevent  their  giving  “  preferences.”  But  it 
could  not  compel  a  company  to  comply  with  special  acts 
or  special  provisions  of  its  charter.  This  was  a  serious 
difficulty,  because  the  question  of  proper  facilities  was 
closely  connected  with  charter  requirements,  and  the  rail¬ 
road  could  almost  anywhere  raise  the  point  of  want  of 
jurisdiction. 

Nor  could  it  enforce  its  decrees.  Passive  resistance  of 
the  railroads  and  jealousy  on  the  part  of  the  old  estab¬ 
lished  courts,  combined  to  produce  this  effect.  For 
instance:  under  the  act  of  1854,  if  the  railways  refused 
to  comply  with  the  decisions  of  the  Court  of  Common 
Pleas,  they  were  liable  to  a  fine  of  $1,000  for  every  day’s 
delay.  The  London,  Chatham,  &  Dover  Railway  refused 
to  comply  with  one  of  the  commission’s  decisions,  and 
claimed  that  they  were  not  liable  to  any  such  fine, 
although  all  the  powers  of  the  Court  of  Common  Pleas, 
under  the  act  of  1854,  had  been  transferred  to  the  Rail¬ 
way  Commission  by  the  act  of  1873.  The  Court  of 
Exchequer  actually  sustained  the  railroad  ;  and  it  was 
not  until  1878  that  by  a  decision  of  the  Queen’s  Bench 
the  Railway  Commission  really  had  the  power  to  do  any¬ 
thing  if  a  company  chose  to  disregard  its  orders. 

The  injunctions  of  the  commission  at  best  only  affect, 
the  future;  for  any  remedy  for  the  past  there  must  be  a 
new  complaint  and  trial  before  a  regular  court.  And  so 
it  often  happens  that  a  railroad,  after  exhausting  all  its 
means  of  resistance,  obeys  the  decision  of  the  commission 
in  reference  to  one  particular  station,  without  taking  any 
notice  of  it  at  other  stations  where  the  same  principle  is 
involved.  Thus,  in  the  case  of  the  manure  traffic  of 
Aberdeen,  after  long  litigation  the  rate  was  decided  to  be 
illegal.  The  railroad  then  reduced  its  Aberdeen  rates, 


ENGLISH  RAILROAD  LEGISLATION. 


175 


but  continued  its  old  schedule  of  charges  at  other  points 
on  its  route  where  there  were  not  organized  interests 
strong  enough  to  make  a  fight. 

On  the  face  of  the  act  of  1873  the  decisions  of  the 
commission,  as  to  what  were  questions  of  fact  or  ques¬ 
tions  of  law,  appeared  to  be  final.  But  by  writ  of  man¬ 
damus  from  a  court  of  appeal,  the  decision  on  this  point 
could  be  at  once  taken  out  of  the  hands  of  the  commis¬ 
sion  by  compelling  them  “to  state  a  case,”  which  could 
then  be  made  the  subject  of  action  in  the  higher  court. 
So  this  important  power  was  made  of  no  effect. 

2.  Complaints  before  the  commission  are  not  quite  so 
slow  or  costly  as  they  were  before  the  courts,  but  they 
are  bad  enough  to  prevent  most  men  from  undertaking 
them.  Sir  Frederick  Peel  himself  admits  that  the 
expense  frightens  people  away  from  making  complaints. 
But  this  is  by  no  means  the  worst.  The  testimony  before 
the  Parliamentary  Committee  of  1881-82  is  full  of  matter 
to  startle  those  who  argue  that  because  there  are  few 
complaints  before  the  commission  there  are  few  men  that 
have  grievances.  Men  have  good  reason  to  think  twice 
before  they  enter  a  complaint.  In  the  Aberdeen  manure 
case,  already  referred  to,  the  Aberdeen  men,  successful  at 
every  point,  lost  more  money  than  they  gained.  Every 
important  case  is  so  persistently  appealed  that  the  origi¬ 
nal  promptness  or  cheapness  of  Railway  Commission 
practice  counts  for  nothing.  But  the  indirect  results 
are  yet  worse.  A  complainant  is  a  marked  man  and  the 
commission  cannot  protect  him  against  the  vengeance  of 
the  railroads.  A  town  fares  no  better..  It  complains  of 
high  terminal  charges,  and  the  company  retorts  by  raising 
the  local  tariff  for  that  place  100  per  cent.1  A  coal  mine 


1  Evidence,  1881,  qu,  420,  421. 


RAILROAD  TRANSPORTATION. 


1 76 

complains  of  freight  rates,  and  the  company  refuses  to 
carry  for  it  on  any  terms ;  it  has  ceased,  it  says,  to  be  a 
common  caniei  for  coal.  Even  the  War  Department  is 
afraid.  It  has  its  grievances,  but  it  dares  not  make  them 
public  for  fear  of  reprisals.1  “  It  is  quite  clear,”  says  the 
Secretary  of  the  Board  of  Trade,  “that  it  is  a  very  for¬ 
midable  thing  to  fight  a  railway  company.” 

It  is  not  easy  to  see  what  can  be  done  in  the  face  of 
these  difficulties,  so  different  from  any  thing  which  we  see 
in  most  American  States.  Our  commissioners,  with  fewer 
powers,  have  infinitely  more  power.  The  reason  is,  that 
in  America  to  defy  such  an  authority  involves  untold 
dangers,  public  sentiment  being  irritable  and  unrestrained  ; 
whereas  in  England  it  involves  no  danger  at  all,  public 
sentiment  being  long-suffering  and  conservative. 

The  lawyers  say,  Strengthen  the  legal  element  in  the 
commission.  Some  of  the  railroad  men  say  so  too,  be¬ 
cause  they  think  that  a  commission  formed  on  the  model 
of  the  old  courts  would  interfere  no  more  than  the  old 
courts.  On  the  other  hand,  many  men  desire  the  appoint¬ 
ment  of  a  public  prosecutor  to  relieve  individuals  of  the 
danger  and  odium  of  bringing  complaints  ;  or  that  cham¬ 
bers  of  commerce  may  be  allowed  to  undertake  such  prose¬ 
cutions.  Others  go  still  further,  and  urge  that  the  powers 
of  the  commission  be  increased,  and  that  they  be  allowed 
to  determine,  on  general  grounds,  what  constitutes  a 
reasonable  rate.  The  commission  itself  would  be  glad  to 
do  that.  But  such  a  thing,  however  cautiously  carried 
out,  would  involve  the  Granger  principle  of  fixing  rates. 
It  seems  quite  unlikely  that  Parliament  will  make  any  of 
these  proposed  changes,  except  to  give  chambers  of  com¬ 
merce  the  right  to  prefer  charges. 


1  Evidence,  1881,  qu.  5965. 


ENGLISH  RAILROAD  LEGISLA  TION. 


1 77 


We  have  dwelt  on  the  dark  side  of  the  picture,  because 
there  is  a  general  impression  in  this  country  that  the  Eng¬ 
lish  Railway  Commission  is  a  complete  success.  It  must 
not  be  inferred  that  it  is  a  complete  failure.  It  has  in  the 
first  nine  years  of  its  existence  passed  judgment  on  iio 
cases.  Only  17  of  these  have  been  appealed,  and  in  11  of 
them  the  commissioners  have  been  sustained.  The  deci¬ 
sions  have,  as  a  rule,1  been  marked  by  good  sense  and 
impartiality.  The  direct  good  to  the  complainants  may 
have  been  very  small,  but  the  indirect  good  to  the  public 
was  doubtless  great.  The  commission  has  made  serious 
and  generally  successful  efforts  to  enforce  a  law  in  cases 
where  it  would  otherwise  have  been  a  dead  letter.  These 
particular  cases  may  have  given  more  trouble  than  they 
were  worth.  But  the  very  existence  of  such  a  power  con¬ 
stitutes  a  check  upon  arbitrary  action  in  general.  We 
cannot  assume,  as  many  do,  that  the  few  complaints  pre¬ 
ferred  before  the  commission  represent  any  thing  like  the 
amount  of  well-founded  grievances.  But  we  can  assume 
that  the  chance  for  such  complaints  to  be  made  and 
heeded  makes  the  railroad  managers  more  cautious  in 
giving  occasion  for  them.  Although  no  one  is  fully  satis¬ 
fied  with  what  the  commission  has  done,  the  great  majority 
of  shippers  are  obviously  of  the  opinion  that  it  has  pre¬ 
vented  much  evil  which  would  otherwise  have  gone  on 
unchecked. 

Passing  from  the  means  of  dealing  with  the  complaint 
to  the  substance  of  the  complaints  themselves,  we  find,  in 
England  as  everywhere  else,  two  distinct  sets  of  griev¬ 
ances,  involving  totally  different  treatment.  Some  charges 
are  complained  of  as  exorbitant  in  themselves,  involving 
extortion.  Others  are  complained  of  as  unequal,  involv- 


1  With  exceptions  to  be  hereafter  noted. 


178 


RAILROAD  TRANSPORTATION. 

ing  discrimination.  When  railroads  were  first  chartered 
people  feared  the  first  evil  and  hardly  thought  of  the 
second.  They  tried  to  prevent  extortion  by  a  very  definite 
system  of  maximum  rates  and  fares.  For  almost  every 
conceivable  sort  of  goods  the  charter  prescribed  how  much 
toll  the  railroad  might  take  for  use  of  the  way,  how  much 
for  furnishing  the  motive  power,  and  how  much  for  fur¬ 
nishing  the  cars;  also  what  rates  it  might  charge  for  all 
these  services  combined.* 1 

It  is  hardly  necessary  to  say  that  these  provisions  were 
of  little  effect.  There  were  several  reasons  for  this. 
First,  the  railroads  could  carry  much  cheaper  than  was  at 
fust  expected  ;  so  that  most  of  the  maxima  were  too  high 
to  be  of  any  practical  effect.  Second,  the  whole  system 
of  provisions  concerning  equal  mileage  rates,  terminals, 
classification,  etc.,  is  quite  inapplicable  to  the  new  condi¬ 
tions  of  railroad  service  which  have  grown  up  since  the 
original  charters.  Every  careful  student  of  the  question 
from  Morrison,  in  1836,  down  to  the  committees  of  1872 
and  1882,  has  come  to  the  conclusion  that  fixed  maxima 
are  of  next  to  no  use  in  preventing  extortion. 

Still,  the  system  of  charter  maxima  is  not  absolutely 
without  effect.  A  few  articles  have  risen  greatlyin  value 
since  the  time  of  the  charters.  The  charter  maxima  for 
manure  were  very  low;  and  an  Aberdeen  Company 
brought  suit  to  compel  the  railroad  to  carry  highly  valua- 
ble  artificial  fertilizers  under  the  old  manure  rates  per  ton. 

he  railroad  tried  to  take  refuge  under  the  inconsistencies 

1  It  is  worthy  of  notice  that  these  rates  were  not  based  upon  cost  of 
service  but  mainly  upon  the  value  of  the  goods,  and  that  certain  articles 
w  en  destined  for  export  were  allowed  a  much  lower  maximum  rate  than  the 
same  article  when  destined  for  home  consumption.  In  the  charter  of  the 
Stockton  &  Darlington  Railway  the  maximum  for  coal  in  general  was  a*. 
per  ton  per  mile,  but  for  export  coal  only  \d. 


ENGLISH  RAILROAD  LEGISLATION . 


179 


of  the  charter  itself,  but  was  not  allowed  to,  and  the 
Aberdeen  company  won  their  case.  But  instances  like 
these  are  infrequent. 

A  more  important  case  is  that  of  certain  short-distance 
rates,  especially  on  agricultural  produce,  where  the  rail¬ 
roads  make  heavy  terminal  charges  of  questionable  legality. 
The  number  of  instances  of  this  kind  is  very  large.  The 
source  of  the  trouble  is  this :  while  the  train  expenses  per 
ton  moved  have  decreased  enormously,  the  station  ex¬ 
penses  have,  on  the  whole,  risen  ;  in  some  cases  they  have 
risen  enormously.  Not  only  is  the  old  schedule  relatively 
unfair,  it  is,  in  some  instances,  absolutely  unfair  to  the 
roads,  because  it  does  not  enable  them  to  meet  increased 
station  expenses  on  short-distance  freight.  There  is  a 
sharp  conflict  now  going  on,  in  the  courts  and  in  Parlia¬ 
ment,  concerning  the  right  of  the  railroads  to  indemnify 
themselves  for  these  expenses.1  The  law,  as  it  stands, 
seems  to  favor  the  shipper  ;  but  it  also  seems  likely  that 
the  railroads  can  justify  their  action  on  equitable  business 
principles.  If  so,  business  principles  are  likely  to  prove 
mightier  than  a  half-obsolete  regulation  in  a  charter. 

The  plan  of  trying  to  keep  down  rates  by  a  limitation 
of  dividends  has  been  often  proposed,  but  they  have  had 
too  much  sense  to  believe  in  it.  Government  revision  of 
rates  has  been  tried  to  a  slight  extent,  but  the  authorities 
abstained  from  putting  the  new  maxima  very  low,  and  the 
revision  really  amounted  to  nothing.  The  right  to  revise 
rates,  quite  independently  of  any  charter  provisions,  has 
always  been  insisted  upon  by  Parliament,  but  even  Prof. 
Hunter,  the  Simon  Sterne  of  English  investigations, 
admits  that  “  it  would  require  an  extremely  strong  case 
to  justify  interference.”  There  is  no  present  likelihood 
of  this  right  being  exercised. 


1  The  much-vexed  question  of  “  station  terminals.” 


i8o 


RAILROAD  TRANSPORTATION. 


The  subject  of  exorbitant  rates  is  really  a  subordinate 
one.  It  is  the  question  of  differential  rates  that  most 
agitates  the  public  mind  5  and  it  comes  up  in  almost 
exactly  the  same  forms  which  it  takes  in  America.  One 
set  of  low  rates  arises  from  competition  of  different 
routes,  another  from  special  contracts  to  develop  busi¬ 
ness. 

As  we  have  already  seen,  the  low  differentials  for  com¬ 
peting  points  do  not  arise  from  the  competition  of  rail¬ 
roads  with  one  another ;  at  least  not  to  any  great  extent. 
They  arise  from  the  competition  of  water  routes.  The 
long  line  of  sea-coast  and  the  great  number  of  navigable 
rivers  and  canals  make  this  a  more  important  element  in 
England  than  anywhere  else.  The  committee  of  1872 
say  that  there  is  a  sea  competition  at  about  three  fifths  of 
the  stations  in  the  United  Kingdom.  And  thus  it  hap¬ 
pens  that  while  there  is  every  year  less  and  less  compe¬ 
tition  between  railroads,  there  is  every  year  more  and 
more  complaint  of  discrimination. 

The  railroads  have  tried  hard  enough  to  control  the 
water  routes.  They  have  gotten  possession  of  competing 
canals,  sometimes  by  methods  whose  legality  was  doubtful. 
In  the  case  of  natural  waters  they  have  tried  to  get  con¬ 
trol  of  the  shipping  or  of  the  harbor  facilities ;  and  it  is 
said  that  one  railway,  the  North-Eastern,  running  to  all 
points  on  the  Yorkshire  coast  and  on  the  Tyne,  has  so  far 
succeeded  as  to  control  competition  by  routes  on  the  open 

sea.  The  water  is  free,  but  the  railroad  controls  the  land¬ 
ing-places. 

But  there  is  one  large  and  constantly  increasing  set  of 
water  routes  which  the  railroad  cannot  control — the  routes 
of  trade  between  London  and  foreign  countries.  The 
western  and  northern  railroads  want  their  share  of  the 


ENGLISH  RAILROAD  LEGISLATION. 


1 8 1 


traffic  between  America  and  London ;  the  southern  and 
eastern  roads  want  their  share  of  the  traffic  between  Con¬ 
tinental  Europe  and  London.  The  railroads  enter  this 
contest  under  some  decided  disadvantages.  It  is  the 
case  of  a  combined  water  and  rail  route  competing  with 
an  all-water  route  which  is  not  essentially  longer  in  dis¬ 
tance.  The  distance  from  New  York  to  London  via  Glas¬ 
gow  or  Liverpool  is  about  the  same  as  via  the  Thames. 
The  distance  from  Boulogne  to  London  by  Folkestone 
is  not  much  shorter  than  from  Boulogne  to  London  by 
direct  steamer.  And  the  rail  route  involves  one  extra 
handling  of  the  goods-.  The  direct  water  rates  are  al¬ 
ready  so  low  that  the  railroad’s  share  of  a  combined  rate 
must  be  very  small  indeed  ;  much  smaller  than  that  they 
charge  on  their  inland  business  for  the  same  service. 

Thus,  the  rate  from  Glasgow  to  London  on  the  beef  of 
American  cattle  slaughtered  at  the  wharf  is  45s.  per  ton, 
while  for  Scotch  meat  the  rate  for  the  same  service  is  yys. 
Foreign  hops  are  charged  1  js.  6d.  per  ton  from  Boulogne 
to  London  ;  English  hops  are  charged  35^.  per  ton  from  in¬ 
termediate  points.  Norway  lumber  is  conveyed  at  about 
half  the  rates  charged  for  English  lumber  of  the  same 
quality.  There  are  hundreds  of  such  examples  which 
might  be  given.  Of  course  English  producers  feel  very 
indignant  at  such  discriminations  ;  and  they  feel  worse 
because  it  all  seems  to  be  for  the  benefit  of  foreigners. 
The  same  sort  of  feeling  was  shown  here  before  the  Hep¬ 
burn  Committee  by  the  New  York  men,  who  complained 
that  the  railroads  carried  cheaper  for  citizens  of  other 
States ;  but  in  England,  where  it  is  a  case  involving  other 
nations ,  matters  seem  far  worse.  These  competitive 
through  rates  appear  to  the  English  public  like  a  premium 
on  imports  against  home  production. 


I°2  RA ILROA D  TRANSPOR  TA  TJO N. 

Special  rates  to  develop  business  have  grown  up  in  the 
same  way  as  in  America;  it  is  hardly  necessary  to  cite  in¬ 
stances.  The  Midland  Railway  alone  has  thirty  million 
such  rates.  They  are  rarely  based  on  personal  favor¬ 
itism  in  any  open  or  outrageous  way.  It  is  certain 
localities  or  certain  lines  of  business  which  the  railroads 
favor,  as  against  other  localities  or  trades. 

The  attempt  at  state  control  of  differential  rates  began 
about  the  time  when  railroad  consolidation  became  im¬ 
portant.  By  act  of  1845  the  companies  were  allowed  to 
vary  their  charges  at  will  within  the  maxima,  but  must 
charge  all  persons  the  same  rate  for  the  same  service. 
This  position  was  reaffirmed  in  the  act  of  1854,  by  which 
the  railroads  were  forbidden  to  grant  undue  and  unrea¬ 
sonable  preferences.  But  this  act  left  it  to  the  Court  of 
Common  Pleas  to  determine  what  constitutes  an  undue 
preference.  This  jurisdiction  was  transferred  to  the  Rail¬ 
way  Commissioners  in  1873.  The  Court  of  Common 
Pleas  took  up  the  matter  most  unwillingly.  In  every 
possible  case  it  tried  to  shift  the  responsibility  upon  other 
courts.  One  of  the  great  difficulties  about  obtaining  re¬ 
dress  under  the  act  of  1854  was  that  the  complainant 
would  be  sent  from  one  court  to  another,  and  each  would 
be  unwilling  to  do  any  thing.  In  the  years  1854-73  there 
were  only  twenty-nine  cases  under  the  act,  and  many  of 

these  were  not  under  the  section  dealing  with  discriminat¬ 
ing  rates. 

From  the  outset  the  court  enforced  the  point  that  there 
should  be  no  personal  preferences;  that  under  exactly 
similar  circumstances  all  shippers  should  be  treated  alike. 
The  railroads  could  make  as  many  special  rates  as  they 
pleased,  but  they  must  be  given  to  everybody  under  the 
same  conditions.  They  took  this  position  so  decidedly 


ENGLISH  RAILROAD  LEGISLATION  1 83 

that  they  stopped  the  practice  of  personal  favoritism 
almost  entirely.  Previous  to  1854  there  had  been  many 
complaints  of  this  kind ;  afterward  we  find  very  few. 
Rebates,  such  as  there  were,  were  given  secretly  ;  when 
they  were  discovered  the  companies  made  private  settle¬ 
ment  for  back  differences  with  the  parties  aggrieved. 
The  fact  that  a  rate  was  kept  secret  was  considered  prima- 
facie  evidence  of  personal  preference. 

On  other  points  the  decisions  conflicted,  until  the  ad¬ 
vent  of  the  Railway  Commissioners.  Since  then  they 
have  all  tended  in  one  direction.  It  was  held  in  the  case 
of  Evershed  vs.  L.  and  N.  W.,1 *  that  the  mere  existence  of 
competition  in  one  case  and  not  in  another,  did  not 
justify  any  difference  of  treatment,  Two  years  later  in 
the  case  of  Budd  vs.  L.  and  N.  W.  Railway  Co.,3  the 
Court  of  Exchequer  asserted  as  law  what  is  known  in 
America  as  the  “  short-haul  ”  principle,  namely,  that  the 
whole  distance  between  any  two  points  must  not  be 
charged  less  than  a  part  of  it.  Two  years  later,  in  the 
very  important  case  of  The  Denaby  Main  Colliery  Co.  vs. 
M.,  S.,  and  L.  Railway,3  it  was  held  that  the  greater  dis¬ 
tance  must  be  charged  actually  more.  A  year  later,  in 
the  case  of  Richardson  and  others  vs.  Midland,4 *  these 
principles  were  applied  in  comparing  rates  not  on  the 
same  route,  but  on  different  branches  of  the  same  road. 
And,  finally,  in  the  case  of  The  Broughton  and  Plas 
Power  Coal  Co.  vs.  Great  Western,6  it  was  held  that  the 

1  Third  Rep.  Railway  Commissioners  (1875-6),  p.  3.  These  references 
are  to  the  series  of  parliamentary  reports,  not  to  the  law  reports  covering 

the  same  ground. 

3  36  L.  T.,  N.  S.,  p.  802.  Not  a  Railway  Commissioners’  case. 

3  7  R.  Com.  (1880),  p.  5. 

4  8  R.  Com.  (1881),  p.  6. 

6  10  R.  Com.  (1883),  p.  1 


RA ILROA  D  TRA  NSPOR  TA  TIO  N. 


I84 

differences  in  charge  must  be  greater  than  the  difference 
in  cost ;  that  is,  that  the  railroad  must  make  more  profit 
on  through  shipments  than  on  local  ones.* 1 

These  cases,  and  others  involving  the  same  principles, 
show:  1.  That  the  commissioners  are  acting  upon  the 
theory  that  rates  should  be  based  upon  cost  of  service.2 * * 
2.  That  they  propose  to  apply  it  to  an  extent  which  has 
proved  impracticable  wherever  tried,  whether  by  Bismarck 
or  by  the  Grangers.  3.  That  they  intend  to  use  it  as  a 
protection  to  vested  rights,  against  the  levelling  tendencies 
of  the  railroad  system.  American  courts  generally  con¬ 
tent  themselves  with  trying  to  use  the  cost-of-service 
principle  to  prevent  the  creation  of  inequalities.  The 
English  courts  use  the  same  principle  to  prevent  their 
abolition.  This  is  the  explicit  intent  of  the  Denaby 
Main  Colliery  decision. 

The  Commissioners’  lack  of  power  has  prevented  them 
from  doing  the  harm  that  any  general  application  of  these 
principles  would  produce.  It  has  also  prevented  the 
proof  that  the  principles  were  impracticable,  which  would 
so  soon  make  itself  felt  if  they  were  rigidly  applied.  But 
they  have  caused  things  to  be  looked  at  in  a  wrong  light. 
The  railroads,  finding  it  of  no  avail  to  plead  value  of  ser¬ 
vice  or  necessities  of  competition  as  the  reason  for  in¬ 
equality,  attempt  to  prove  a  difference  in  the  cost  of 
service,  where  it  does  not  really  exist.  And  so  we  have 
the  spectacle  of  shippers,  courts,  and  railroads  attempting 

to  stretch  a  wrong  principle  to  cover  cases  to  which  it 
does  not  apply. 

But  there  were  a  great  many  cases  where  the  standard 

1  Not  more  in  proportion,  but  more  on  each  consignment  of  a  Civen 

quantity.  & 

3rIhe  Caledonian  Railway  was  forbidden  to  charge  more  on  cannel  coal 

than  on  less  valuable  kinds. — 2  R.  Com.,  p.  1. 


ENGLISH  RAILROAD  LEGISLA  TION. 


185 


was  not  elastic  enough  to  suit  the  facts,  and  the  facts  too 
stubborn  to  be  squeezed  down  to  the  standard  ;  and  this 
led  to  the  appointment  of  the  parliamentary  committee 
of  1881-82  to  consider  the  subject  of  discriminating  rates. 
The  twenty-seven  members  of  the  committee  represented 
a  great  variety  of  conflicting  interests  ;  four  of  them  were 
railroad  men.  After  hearing  a  vast  mass  of  testimony, 
this  committee  came  to  a  different  conclusion  from  the 
commission,  and  a  more  sensible  one.  When  the  commit¬ 
tee  came  to  make  up  their  report  two  drafts  were  pre¬ 
sented,  one  decidedly  favorable  to  the  railroads,  the  other 
criticising  them  moderately.  The  first  was  rejected  by  a 
vote  of  12  to  10;  but  the  second  was  so  amended  as  to 
bring  in  many  of  the  ideas  of  the  first ;  and  the  final 
report  as  it  stands  defends  differential  rates,  and  does  not 
regard  cost  of  service  as  the  sole  standard.  The  report  is 
negatively  rather  than  positively  good ;  but  as  compared 
with  recent  English  decisions,  it  is  a  great  advance.  No 
action  was  taken  by  Parliament  upon  it ;  in  fact,  as  far  as 
concerns  our  present  subject,  it  calls  for  no  action.  It 
simply  declared  that  there  were  no  general  grounds  for 
interference. 

The  present  state  of  things  may  be  summed  up  as  fol¬ 
lows  : 

1.  The  roads  may  make  what  special  rates  they  please; 
but  if  they  make  a  rate  for  one  man  they  must  extend 
the  same  privilege  to  all  others  in  like  circumstances.  If 
they  have  been  secretly  paying  rebates  to  one  shipper, 
they  may  be  compelled  to  refund  to  any  other  shipper 
similarly  placed,  the  same  rebates  on  all  his  shipments 
since  the  special  contract  with  the  one  shipper  began. 

2.  It  is  held  by  the  Railway  Commissioners  that  two 
shippers  are  similarly  placed  and  must  be  similarly  treated 


RAILROAD  TRANSPORTATION. 


1 86 

when  the  cost  to  the  railroad  of  handling  the  goods  for 
one  is  the  same  as  for  the  other ;  and,  conversely,  unless 
some  special  reason  can  be  shown,  the  railroad  has  no  right 
to  put  a  less  favorably  situated  shipper  on  an  equality  with 
a  more  favorably  situated  one. 

3.  But  the  last  parliamentary  committee  has  refused  to 
indorse  these  principles,  and  has  said  that  “  a  preference  is 
not  unjust  so  long  as  it  is  the  natural  result  of  fair  compe- 
titioa” 


CHAPTER  X. 


RAILROAD  POLICY  IN  FRANCE. 

Traditions  of  government  activity— General  scheme  adopted  in  1842 — 
Gradual  consolidation  under. six  companies — Legislation  of  1859 — Gov¬ 
ernment  guarantees  of  interest — Local  roads — Attempt  to  combine  them 
for  speculative  purposes — Movement  in  favor  of  state  ownership  De¬ 
cree  of  1879 — Financial  difficulties — Failure  of  the  project  Contracts 
with  the  companies,  1884 — Mileage  and  dividends  Effects  of  the 
French  system  upon  construction,  traffic,  and  rates.  1 

The  traditions  of  Continental  Europe  all  pointed  toward 
government  monopoly  of  the  means  of  transportation. 

There  is  one  respect  in  which  England  and  America  are 
like  one  another,  but  sharply  different  from  France,  Ger¬ 
many,  or  other  European  countries.  It  is  in  the  way  in  which 
people  in  general  are  disposed  to  regard  government  inter¬ 
ference.  The  English  and  American  maxim  is  that  what¬ 
ever  can  be  done  without  government,  should  be  thus  done. 
The  continental  principle  is  that  whatever  can  be  done  by 
government,  should  be.  It  has  become  a  commonplace  say¬ 
ing  that  our  Anglo-American  idea  of  liberty  is  not  developed 
in  Continental  Europe.  When  a  Frenchman  speaks  of  lib- 

1  French  railroad  literature  is  full  and  valuable,  but  unfortunately  not 
easy  of  access  to  American  readers.  The  great  authority  is  A.  Picard : 
“  Les  Chemins  de  Fer  Fran9ais,”  5  vols.,  Paris,  1884.  This  is  nothing  less 
than  a  well-digested  collection  of  all  important  public  acts  and  utterances  of 
French  railroad  policy — as  nearly  as  possible  in  their  original  form.  The 
works  of  Duverdy  and  Jacqmin  are  also  of  great  value. 

Much  use  has  been  made  of  the  Annates  des  Ponis  et  Chaussdes.  The 
Revue  Generate  des  Chemins  de  Fer  is  more  purely  technical  in  its  character. 

187 


1 88 


RA ILR  OA  D  TRA  NSP  OR  TA  TION. 


erty,  it  is  not  so  much  freedom  from  interference  with  his 
own  movements  that  he  seeks,  as  the  right  and  power  to 
interfere  with  other  people’s  movements.  What  he  really 
wants  is  political  power.  A  party  may  call  itself  liberal 
or  republican  ;  but  when  it  gets  into  power  it  governs 
about  as  strictly  as  its  predecessors.  Sometimes  there  is 
a  monarchy,  sometimes  a  democracy  ;  but  there  is  always 
a  bureaucracy — a  government  by  office-holders. 

This  habit  of  governing  and  being  governed  has  resulted 
in  much  better  state  work,  and  much  worse  individual  work. 
On  the  continent  of  Europe  private  enterprise  at  best  was 
timid.  In  many  countries  it  seemed  hardly  possible  to  have 
railroads  at  all  unless  the  state  took  the  initiative.  The 
state  controlled  the  roads  and  canals.  It  had  managed 
the  post-office  for  centuries.  In  due  time,  it  took  up  the 
telegraph  as  a  branch  of  the  post-office.  People  had  looked 
to  it  to  take  up  the  railroad  system  as  a  branch  of  the  road 
and  canal  system,  in  exactly  the  same  way  that  it  after¬ 
ward  took  the  telegraph. 

This  was  not  done  ;  there  were  financial  reasons  in  the 
way.  To  build  a  system  of  railroads  involved  a  somewhat 
speculative  expenditure  of  capital,  on  a  scale  sufficient  to 
frighten  conservative  statesmen.  Small  states  with  good 
credit  might  undertake  something  of  the  kind.  Large 
states,  like  France,  Austria,  or  Prussia,  did  not  venture  to 
do  so.  They  adopted  a  policy  of  subsidies  to  encourage 
private  companies,  for  without  such  subsidies  much  neces¬ 
sary  work  could  not  be  done  at  all.  In  return  for 
these  subsidies,  they  reserved  more  or  less  important 
rights  of  state  control. 

Thus  the  early  history  of  European  legislation  was  deter¬ 
mined  not  so  much  by  the  character  or  wishes  of  the  dif¬ 
ferent  governments,  as  by  their  financial  condition.  The 


RAILROAD  POLICY  IN  PRANCE. 


189 


small  states  adopted  a  policy  of  at  least  partial  govern¬ 
ment  ownership,  best  typified  in  Belgium.  The  large 
states  adopted  a  policy  of  support  and  control  without 
actual  ownership.  This  was  most  consistently  carried  out 
in  France.  Austria  (and  afterward  Italy)  for  a  long  time 
stood  somewhat  near  to  France  in  their  general  policy ; 
Prussia  inclined  more  toward  the  Belgian  system.  Since 
1870  there  has  been  an  almost  general  movement  away 
from  the  policy  of  state  support  and  control,  and  toward 
that  of  actual  ownership.  The  difficulties  of  control  have 
been  found  greater,  the  financial  risks  of  ownership  less. 
Above  all,  the  governments  have  been  roused  to  the  idea 
of  the  supreme  importance  of  a  railroad  policy  as  an  ele¬ 
ment  in  the  industrial  and  even  in  the  political  life  of 
nations,  and  have  felt  that  nothing  short  of  complete 
ownership  and  direct  management  of  railroads  would  give 
them  the  power  to  which  they  aspired. 

So  much  for  the  general  influences  which  have  acted 
everywhere.  It  is  hardly  necessary  to  say  that  each  sep¬ 
arate  nation  had  a  railroad  history  of  its  own,  in  which 
the  traits  of  its  national  character  were  reflected. 

This  was  strikingly  the  case  in  France.  A  Frenchman 
cares  very  much  more  for  systematic  arrangement  than  an 
Englishman,  and  very  much  less  for  original  and  untram¬ 
melled  business  activity.  The  system  of  roads  and  water¬ 
ways  existing  in  1830  suited  the  French  nation  exactly. 
They  were  so  arranged  that  they  looked  well  on  the  map ; 
so  classified  that  each  bore  its  exact  proportion  of  import¬ 
ance,  whether  national,  departmental,  or  local.  They  were 
regulated  from  Paris  with  ease,  and  yet  with  military  pre¬ 
cision.  Never  was  there  so  good  a  corps  of  engineers  for 
carrying  out  government  programmes  as  that  which  was 
trained  at  the  Ecole  des  Ponts  et  Chauss£es  in  Paris. 


19°  RAILROAD  TRANSPORTATION. 

They  were  men  of  first-rate  training  and  high  general 
standard  of  talent.  Few  of  them  were  men  of  genius  or 
originality  in  the  highest  sense  of  the  word.  Yet  this 
very  absence  of  rule-breaking  genius  probably  rendered 
them  all  more  efficient  as  a  body  of  trained  public  ser¬ 
vants.1 

France  was  slower  than  some  of  her  neighbors  in  taking 
up  railroad  construction,  probably  because  her  roads  were 
so  good  and  her  engineers  so  well  drilled.  Nor  was  the 
nation  at  all  inclined  to  let  a  railroad  system  grow  up 
piecemeal.  They  wanted  a  comprehensive  scheme  or 
none  at  all.  The  very  first  thing  done  (except  to  charter 
a  few  horse-railroads  in  1826-32)  was  to  appropriate  money 
to  pay  the  government  engineers  for  laying  out  a  general 
system  of  railroad  lines.  When  this  survey  was  completed, 
they  next  took  up  the  question  of  principles  of  ownership 
and  management.  While  other  countries  were  acting  and 
experimenting,  France  was  reasoning.  There  was  a  long 
series  of  debates  in  the  years  1837-1840.  Nothing  was 
settled  until  1842.  The  author  of  the  plan  finally  adopted 
was  Thiers.  The  state  was  to  contribute  about  $50,000 
per  mile,  and  own  the  road-bed.  Private  enterprise  was 
to  be  called  upon  for  whatever  was  necessary  (about 
$40,000  per  mile)  for  track,  equipment,  buildings,  etc. 
After  some  forty  years  the  whole  was  to  revert  to  the 
state. 

If  the  French  had  delayed  a  long  time,  they  had  at  any 
rate  succeeded  in  maturing  plans,  both  of  engineering  and 
of  legislation,  which  they  have  since  carried  out  pretty 
consistently.  Both  in  the  arrangement  of  the  lines  and 
in  their  relation  to  the  government,  they  have  maintained, 
with  variations  of  detail,  the  form  contemplated  from  the 


1  M.  M.  v.  Weber  .  “  Nationalist  und  Eisenbahnpolitik,”  pp.  30,  31, 


RAILROAD  POLICY  IN  FRANCE. 


I9I 

first.1  This  is  more  than  can  be  said  of  any  other 
country. 

Under  this  plan  thirty-three  different  companies  were 
chartered  with  about  twenty-five  hundred  miles  of  author¬ 
ized  line.  Railroad  building  went  on  rapidly  until  the 
revolution  of  1848  ;  it  was  then  checked  so  suddenly  that 
the  next  three  years  show  an  actual  decrease  in  the  mile¬ 
age  in  operation.  With  the  accession  of  Napoleon  III.  in 
1851,  there  came  a  new  era  of  railroad  activity,  which 
lasted  until  the  crisis  of  1857.  This  activity  was  stimu¬ 
lated  by  a  change  in  the  charters,  extending  their  duration 
in  general  to  ninety-nine  years  from  date  of  alteration. 
Had  the  original  plan  been  followed  out,  the  lines  would 
now  be  reverting  to  the  government.  As  it  is,  they  will 
remain  in  private  hands  till  the  middle  of  the  twentieth 
century. 

The  crisis  of  1857  produced  so  complete  a  stoppage  of 
railroad  building  that  new  legislation  was  resorted  to. 
This  stoppage  and  this  supplementary  legislation  were  an 
almost  necessary  consequence  of  the  French  system.  The 
lines  had  been  laid  out  with  the  idea  of  avoiding  all  waste 
of  capital.  They  were  traced  by  government  engineers ; 
each  part  stood  in  its  proper  relation  to  the  whole. 
Parallel  roads  were  forbidden  as  a  matter  of  course.  At 
first  this  worked  extremely  well.  It  forced  the  numerous 
independent  companies  to  work  in  harmony  with  one 
another.  But  it  rendered  the  process  of  consolidation  all 
the  easier.  Soon  after  the  accession  of  Napoleon  there 
were  but  eleven  independent  companies.  In  a  few  years 
more  the  eleven  were  reduced  to  six — five  radiating  from 

1  Leon  Aucoc  :  “Conferences  sur  1’ Administration  et  le  Droit  Adminis¬ 
trate,”  vol.  iii.  A  resume  of  the  part  bearing  on  railroad  policy  has  been 
published  in  the  Journal  of  the  Statistical  Society  (London),  vol.  xlv.,  pp. 
496-504. 


192 


RA ILROA  D  TRA  NSP  OR  TA  TION. 


Paris  in  different  directions,  the  sixth  in  the  extreme 
south.  Each  had  a  monopoly  in  its  own  district.  For 
the  through  traffic  between  the  great  centres  there  was 
very  little  competition,  either  actual  or  possible.  This 
was  a  state  of  things  which  has  not  prevailed  to  the  same 
extent  in  any  other  actively  industrial  country.  Its  effects 
were  distinctly  bad.  It  had  the  effect  of  making  the  roads 
neglect  the  development  of  local  business  by  branch  lines. 
The  through  business  brought  a  greater  rate  of  profit 
than  the  local  or  branch-line  business  was  likely  to.  Not 
being  afraid  of  interference  in  the  former,  they  felt  no 
necessity  for  securing  the  latter.  This  is  why  the  stop¬ 
page  of  railroad  construction  in  1857  was  so  complete. 

New  railroad  construction  was  necessary  for  the  devel¬ 
opment  of  the  country.  In  order  to  secure  it  the  govern¬ 
ment  had  recourse  to  a  system  of  guarantees  of  interest. 
The  general  scheme  for  this  purpose  was  devised  by  De 
Francqueville  in  1859.  The  roads  under  profitable  opera¬ 
tion  were  set  apart  under  the  title  of  “  old  net-work  ” 
(ancien  reseau).  The  lines  which  were  unprofitable,  and 
the  far  greater  number  of  lines  not  yet  constructed,  were 
together  classed  as  the  “  new  net-work.”  Each  of  the  six 
companies  undertook  the  construction  of  a  large  number 
of  new  lines  in  its  own  district.  Money  for  their  con¬ 
struction  was  raised  by  bonds  on  which  the  government 
guaranteed  four  per  cent,  interest  plus  a  contribution  to 
a  sinking  fund  which  should  be  sufficient  to  pay  off  the 
bonds  at  maturity.  These  interest  charges  did  not  con¬ 
stitute  a  first  lien  on  the  income  of  the  companies.  They 
were  not  called  upon  to  pay  any  of  this  interest  unless 
the  surplus  on  the  old  net-work  was  sufficient  to  pay  such 
dividends  as  they  had  been  paying  in  the  past,  plus  certain 
other  fixed  charges.  The  amount  of  this  “  reserved  rev- 


RAILROAD  POLICY  IN  FRANCE. 


*93 


enue  ”  was  fixed  by  special  agreement  with  each  company. 
Any  thing  in  excess  of  this  went  to  pay  interest  on  the 
new  bonds  or  to  repay  the  government  for  such  interest 
previously  advanced.  When  the  companies  were  no 
longer  indebted  to  the  government,  or  forced  to  have 
recourse  to  its  guarantees,  they  were  then  allowed  to 
increase  their  dividends  beyond  the  percentage  fixed  by 
agreement. 

The  provision  that  every  thing  should  revert  to  the 
state  after  ninety-nine  years,  or  thereabouts,  remained 
unchanged.  There  was  an  additional  provision  giving  the 
state,  after  fifteen  years,  the  right  to  buy  up  any  or  all  of 
the  roads,  on  terms  favorable  to  the  stockholders. 

The  legislation  of  1859,  'm  main  provisions,  remained 
unaltered  until  1884.  The  changes  of  1863  and  of  1868-9 
were  of  minor  importance.  The  system  as  a  whole  was 
more  advantageous  to  the  railroads  themselves  than  to 
the  government  or  the  country.  The  guarantees  of  in¬ 
terest  made  the  securities  extremely  valuable,  and  lessened 
the  necessity  for  enterprising  management.  Some  roads 
payed  off  their  obligations  to  the  government,  and  got  the 
full  profit  from  lines  which  they  had  themselves  run  no 
risk  in  constructing.  Others  found  it  hopeless  to  try  to 
meet  these  obligations  at  all ;  they  then  pocketed  their 
guaranteed  dividends,  and  let  the  government  pay  interest 
without  any  prospect  of  repayment.  The  companies  were 
literally  in  the  position  “  heads  I  win,  tails  you  lose.” 

No  scheme  arranged  at  Paris  could  meet  all  local  de¬ 
mands  ;  and  it  was  to  satisfy  such  demands  that  a  measure 
foreign  to  the  general  tenor  of  French  legislation  was  put 
in  operation  in  1865.  It  provided  for  the  construction  of 
local  roads,  not  belonging  to  the  great  companies.  The 
local  authorities  were  given  the  right  to  subsidize  such 


194 


RAILROAD  TRANSPORTATION. 


roads  largely.  It  was  provided  that  they  were  to  be  inex¬ 
pensively  built,  and  that  they  should  be  so  arranged  as  to 
form  mere  branches  ;  not  to  be  combined  into  through 
routes  which  might  interfere  with  the  monopoly  of  the  six 
companies. 

Unfortunately  they  did  one  thing  which  rendered  it 
doubtful  whether  the  last  provision  would  be  carried  out. 
They  had  these  local  roads  built  with  standard  gauge. 
The  result  was  what  might  have  been  expected.  After 
the  downfall  of  the  empire,  when  the  central  authority 
was  weaker,  the  prohibition  to  combine  was  practically 
abandoned.  The  scattered  local  roads  now  became  possi¬ 
ble  competitors  of  the  main  systems,  in  case  connecting 
links  should  ever  be  built.  The  cheapness  of  these  local 
roads  made  the  danger  all  the  greater.  In  1875  a  Belgian 
named  Phillippart  tried  the  experiment.  He  was  an  able 
operator,  and  had  succeeded  in  a  similar  attempt  in  his 
own  country  a  few  years  before  ;  but  in  France  the  powers 
opposed  to  him  were  too  strong,  and  in  1876  he  was 
completely  beaten.  He  had  succeeded  in  distorting  the 
local  roads  from  their  true  purpose,  and  extending  them 
into  combined  insolvency,  without  making  them  suffi¬ 
ciently  effective  competitors  against  the  old  roads  for  him 
to  be  able  to  levy  the  blackmail  which  he  had  hoped. 
His  failure  left  his  railroads  in  a  condition  worse,  in  some 
respects,  than  is  that  of  the  West  Shore  to-day. 

These  railroads  lay  in  two  main  groups — one  in  the 
north,  the  other  in  the  southwest.  The  former  was  almost 
immediately  absorbed  by  the  Northern  Railroad,  finan¬ 
cially  the  most  powerful  of  the  French  companies.  The 
southern  group,  after  a  year  or  so  of  the  most  helpless 
misery,  seemed  likely  to  pass  in  the  same  way  into  the 
hands  of  the  Orleans  Railroad,  when  an  agitation  in  favor 


RAILROAD  POLICY  IN  FRANCE . 


!95 


of  direct  state  management  made  itself  strongly  felt,  and 
the  proposition  to  allow  the  consolidation  was  overwhelm¬ 
ingly  defeated  in  the  French  Chamber  of  Deputies. 

The  movement  in  1877  in  favor  of  state  ownership  was 
probably  due  to  patriotism  more  than  to  any  other  one 
cause.  Some  desired  the  government  to  have  more  civil 
power,  others  desired  it  to  have  more  military  power. 
They  had  seen  the  advantage  accruing  to  Germany  in  the 
war  of  1870  from  its  control  over  railroad  administration. 
Bismarck  was  now  engaged  in  still  further  extending  gov¬ 
ernment  ownership  in  Prussia.  Why  should  not  France 
do  the  same,  now  that  such  an  opportunity  offered  ? 
These  reasons,  vigorously  urged,  met  with  all  but  unani¬ 
mous  approval.  The  railroads  of  the  southwest  were 
taken  under  direct  state  management. 

This  was  but  the  beginning.  France  had  fallen  behind 
her  neighbors  in  railroad  building.  She  had  but  thirteen 
thousand  miles  of  railroad,  while  Germany,  with  not  many 
million  more  inhabitants,  had  eighteen  thousand  miles. 
Ten  thousand  miles  more  were  needed.  The  companies 
were  unwilling  to  build  them.  With  perhaps  two  excep¬ 
tions,  they  had  reached  a  condition  like  that  which  existed 
in  1859.  If  the  companies  would  not  build  them,  said 
the  ministers,  then  the  state  must  do  so.  De  Freycinet, 
the  Premier,  was  a  sanguine  man,  who  never  did  things  by 
halves.  He  boldly  proclaimed  the  need  of  a  loan  of  six 
hundred  million  dollars  ;  and  then,  without  waiting  to 
know  whether  he  could  get  it,  he  proceeded  to  lay  down 
the  detailed  plan  of  the  work.  By  a  decree  of  July,  1879, 
the  lines  were  determined  upon,  on  the  very  grandest 
scale,  without  detailed  estimates  of  cost. 

It  was  easy  to  draw  the  plans ;  it  was  not  so  easy 
to  secure  the  money.  Even  the  French  Chambers  felt 


I96  RAILROAD  TRANSPORTATION. 

serious  doubts  concerning  the  project  of  public  expendi¬ 
ture  on  a  scale  like  this.  A  little  was  built  each  year, 
with  special  credits  voted  for  the  purpose  ;  but  the  lines 
were  disconnected.  The  question  which  should  be  built 
first,  was  determined  by  the  political  claims  of  rival  local¬ 
ities,  rather  than  on  any  broad  business  principles.  Scat¬ 
tered  as  they  were  throughout  the  country,  there  was 
nothing  to  do  except  to  lease  them  for  short  terms  to  one 
or  another  of  the  six  great  companies,  according  to  the 
district  in  which  they  happened  to  be  situated.  Nor  was 
the  state  much  more  successful  in  the  management  of  its 
roads  in  the  southwest,  which  it  had  taken  up  in  their 
distress.  Instead  of  becoming  a  power  in  the  railroad 
world  by  the  management  of  these  lines,  it  was  brought 
into  a  position  of  weakness.  They  were  not  well  situ¬ 
ated,  and  did  not  reach  Paris  at  all.  Attempts  were  made 
to  secure  a  Paris  connection  for  the  state  by  the  purchase 
of  the  Orleans  system  ;  but  they  were  futile. 

Meantime  financial  affairs  were  taking  a  turn  which  was 
likely  to  put  a  stop  to  all  magnificent  schemes  of  railroad 
construction  or  purchase.  The  power  of  the  French  Gov¬ 
ernment  to  raise  money,  whether  by  taxing  or  by  borrow¬ 
ing,  for  a  long  time  seemed  unlimited,  but  the  limit  began 
to  make  itself  felt  as  early  as  1881.  The  mighty  maker 
of  projects  and  spender  of  money — De  Freycinet — had 
been  forced  to  resign  in  the  autumn  of  1880.  After 
his  departure,  and  under  the  more  strained  financial 
conditions,  France  no  longer  had  the  power  to  carry  out 
his  projects.  At  the  same  time  it  could  not  definitely 
resolve  to  abandon  them.  The  counter-propositions  of 
Leon  Say,  an  able  financier,  were  rejected.  Committee 
after  committee  was  appointed  to  consider  these  ques¬ 
tions ;  but  with  no  result  whatever  until  the  death  of 
Gambetta,  at  the  beginning  of  1883. 


RAILROAD  POLICY  IN  FRANCE. 


197 


In  some  respects  Gambetta  was  to  France  what  Bis¬ 
marck  was  to  Prussia.  He  had  not  the  same  political 
power,  but  he  had  the  same  kind  of  moral  influence.  This 
was  more  evident  after  his  death  than  it  had  been  during 
his  lifetime.  Though  not  the  nominal  leader,  he  was  the 
real  mainstay  of  the  movement  in  favor  of  state  railroads ; 
when  he  died  the  movement  lost  its  strength.  The  very 
men,  like  Raynal,  who  under  Gambetta’s  influence  had 
been  strong  supporters  of  state  management,  now  found 
themselves  more  ready  to  yield  to  financial  necessity  and 
leave  the  railroad  system  to  be  developed  by  private  com¬ 
panies.1  A  series  of  agreements  to  this  effect  was  negoti¬ 
ated  in  1883.  They  were  resolutely  but  unsuccessfully 
opposed  by  the  more  faithful  adherents  of  state  manage¬ 
ment.  By  the  beginning  of  1884,  the  whole  scheme  was 
definitely  settled  ;  apparently  fixing  the  railroad  policy  of 
France  for  some  time  to  come. 

The  leading  bases  of  settlement  are  as  follows  : 

I.  The  state  confines  its  system  to  a  rather  small  district 
in  the  southwest.  The  isolated  lines  which  it  owns  in 
other  parts  of  the  country  it  gives  up  to  the  companies  in 
whose  district  they  are  situated,  making  their  monopoly  all 
the  more  complete.  By  way  of  compensation  it  receives 
a  few  outlying  lines  of  other  companies  which  might  com¬ 
pete  with  the  state  in  its  own  southwestern  district.  It 
abandons  all  idea  of  a  Parisian  line  of  its  own,  merely 
stipulating  for  a  permanent  connection  over  the  lines  of 
the  Western  Railroad.  In  giving  up  the  idea  of  reaching 
Paris,  it  gives  up  all  prospect  of  becoming  a  controlling 
power  in  the  French  railroad  world. 

1  On  the  most  recent  phases  of  French  railroad  history  there  is  an  excel¬ 
lent  article  by  Dr.  v.  d.  Leyen,  in  the  Jahrbuch  filr  Gesetzgebung  (Leipzig), 

N.  F.,  viii.,  4. 


I98  RAILROAD  TRANSPORTATION. 

2.  The  additional  lines  needed  are  to  be  constructed  by 
the  companies  in  whose  districts  they  belong.  The  state 
will  pay  for  them  all ;  not  at  once  (except,  of  course,  in  its 
own  district),  but  by  annual  instalments  of  about  thirteen 
million  dollars  each,  for  seventy-four  years  ;  at  the  end  of 
which  time  the  companies’  charters  expire,  as  arranged  in 
1859,  ancl  the  whole  reverts  to  the  state.  What  the  com¬ 
panies  actually  do  in  this  matter  is  to  advance  the  capital, 
make  what  they  can  out  of  the  roads,  and  receive  their  pay 
in  instalments ;  so  calculated  that  at  the  time  when  the 
charters  expire  they  will  have  recovered  their  original  ad¬ 
vances  with  interest. 

The  length  of  the  line  now  in  operation  and  of  new  line 
to  be  constructed  under  the  conventions  of  1883,  is  as 
follows : 


Miles  now 

To  be 

in  operation. 

constructed. 

Total. 

Mediterranean 

.  4,500 

1,500 

6,000 

Orleans  . 

.  3,ioo 

1,500 

4,600 

Western  . 

.  2,500 

1,000 

3,500 

Eastern  . 

.  .  2,200 

800 

3,000 

Southern 

.  1,500 

1,100 

2,600 

Northern 

.  .  2,000 

300 

2,300 

State 

.  1,300 

700 

2,000 

Total 

.  .  17,100 

6,900 

24,000 

3.  The  distinction  of  old  and  new  net-work  is  given  up. 
The  state  guarantees  each  company  a  minimum  dividend 
equal  to  that  which  it  has  paid  in  recent  years.  If  the 
amount  available  for  dividends  increases  beyond  a  certain 
fixed  percentage,  two  thirds  of  the  excess  goes  to  the 
state.  This  last  provision  is  not  new  in  France ;  but 
previous  conventions  have  only  allowed  the  state  one 
half  of  such  excess.  The  limits  are  placed  so  high  as  to  be 
almost  inoperative.  A  glance  at  them  will  show  what 
profitable  investments  French  railroad  stocks  have  been: 


RAILROAD  POLICY  IN  PRANCE. 


I9t, 


Guaranteed 

Point  beyond 

minimum 

which  state 

per  cent. 

shares  excess. 

Northern 

• 

13-5 

22.1 

Mediterranean 

• 

.  11 

15 

Orleans 

• 

.  11. 1 

14.4 

Southern 

• 

.  10 

12 

Western 

• 

7-7 

10 

Eastern 

• 

7-1 

10 

It  is  not  easy  to  pass  judgment  on  the  effects  of  the 
French  system.  One  thing  the  figures  just  given  show 
plainly  enough  :  that  it  gives  the  high  profits  to  the  rail¬ 
roads.1  In  so  far  as  this  result  is  reached  by  preventing 
waste  of  capital  it  is  good.  In  so  far  as  it  is  reached  by 
not  building  new  lines  to  develop  new  business,  it  is  bad. 
In  France  both  these  effects  are  so  mixed  that  it  is  im¬ 
possible  to  separate  them. 

Up  to  a  certain  point,  extension  of  railroad  enterprise, 
whether  in  the  way  of  construction,  facilities,  or  general 
policy,  is  good  for  the  railroads  and  the  community  both. 
For  a  long  distance  beyond  this  point,  it  on  the  whole 
continues  to  benefit  the  community,  but  on  the  whole 
does  not  increase  railroad  profits,  tending  rather  to  dimin¬ 
ish  them.  Finally,  we  reach  a  point  beyond  which  any 
additional  construction  does  the  community  little  good 
and  some  harm,  while  to  many  of  the  railroads  it  means 
absolute  ruin. 

The  system  of  free  competition  in  the  United  States 
tends  to  keep  railroad  enterprise  near  the  last  point.  The 
system  of  non-competition  in  France  tends  to  keep  it 
from  advancing  much  beyond  the  first  point.  And  as  the 
abuse  of  insolvent  competition  in  the  United  States  oc¬ 
casionally  carries  us  beyond  the  last  point,  so  the  abuse 

1  Or  at  any  rate  to  their  stockholders.  By  far  the  greater  part  of  the 
capital  invested  was  furnished  by  bondholders  at  a  comparatively  low  rate  of 

interest. 


200 


RA ILROAD  TRA NSPOR  TA  TION. 


of  monopoly  privileges  in  France  occasionally  prevents  rail¬ 
roads  from  reaching  the  first  point.  In  spite  of  all  that  can 
be  done  in  the  way  of  state  control,  the  recognition  of 
monopoly  rights  puts  the  railroads  at  an  unfair  advantage 
in  dealing  with  the  public.  They  can  refuse  to  do  what 
does  not  suit  their  own  convenience,  and  persist  in  their 
refusal  until  the  public  makes  favorable  terms  with  them. 
Such  settlements  cannot  be  made  once  for  all.  New  con¬ 
ditions  arise  requiring  new  measures.  What  was  good  in 
i860  was  inadequate  in  1880.  What  is  good  in  1885  will 
probably  be  quite  inadequate  in  1900.  Each  new  settle¬ 
ment  gives  the  railroads  opportunity  for  new  advantages. 
In  1842  it  was  a  subsidy  ;  in  1852,  an  extension  of  charter 
privileges;  in  1859,  a  guarantee  on  bonds;  in  1883,  a 
guarantee  of  dividends.  The  French  monopolist  has  at 
least  as  much  inducement  to  underdo  the  matter  of  rail¬ 
road  enterprise  as  the  American  speculator  has  to  overdo 
it. 

Considering  the  strong  position  of  the  French  railroad 
monopolies,  the  wonder  is  that  the  French  Government 
is  able  to  exercise  such  efficient  control  as  it  does. 
In  certain  respects  this  control  is  really  admirable.  No 
other  country  has  in  its  civil  service  such  a  body  of 
trained  engineers  and  inspectors.  But  even  at  best  there 
is  a  certain  lack  of  elasticity  in  all  these  matters.  Indi¬ 
vidual  needs  are  sacrificed  to  general  rules,  individual 
enterprise  to  general  schemes.  It  is  an  interesting  fact 
that  a  railroad  which  is  owned  and  managed  by  the  state, 
in  its  general  policy  is  much  more  like  our  own  railroads 
than  is  a  road  which  is  owned  by  a  private  company,  but 
strictly  controlled  by  state  regulations.  In  the  latter  case, 
the  state  has  no  direct  interest  in  making  exceptions  to 
its  own  rules.  In  the  former  case,  it  has.  The  rules 


RAILROAD  POLICY  IN  FRANCE. 


201 


which  a  state  will  make  for  itself  are  therefore  less  rigid 
than  those  which  it  will  make  for  other  people.  This 
difference  is  strikingly  seen  in  comparing  the  development 
of  railroads  in  Belgium  or  Germany,  where  the  state 
actually  owned  the  leading  roads,  with  that  in  France, 
where  it  merely  controlled  them.  The  former  was  much 
more  untrammelled. 

Concerning  railroad  charges  in  France,  there  has  been 
less  discussion  than  in  some  other  countries.1  The  gen¬ 
eral  questions  of  railroad  legislation  have  been  treated 
from  the  financial  or  political  standpoint  rather  than  from 
the  industrial  one.  There  can  be  little  doubt  that  the 
general  effect  of  the  system  has  been  to  prevent  reduction 
in  rates.  If  we  take  figures  recently  published  by  Charles 
Baum,2  a  friendly  critic,  we  find  that  the  average  charges 
per  ton-mile  or  passenger-mile  have  remained  virtually 
unchanged  for  many  years.  In  the  freight  rate  there  was 
actually  a  slight  increase  from  1872  to  1881.  The  rates 
in  the  latter  year  were  1.55  cents  per  passenger-mile  and 
1.63  cents  per  ton-mile.  These  rates  are  on  the  whole 
much  higher  than  those  of  Belgium,  probably  somewhat 
higher  than  those  of  Germany,  and  somewhat  lower  than 
those  of  Austria.  Compared  with  the  United  States,  they 
are,  of  course,  much  lower  for  passengers,  and  much 
higher  for  freight. 

There  seems  to  be  no  reason  to  doubt  that  in  a  country 
with  such  natural  resources  and  such  industrial  develop¬ 
ment  as  France,  the  railroads  might  have  done  much 
better  than  this.  But  it  will  not  do  to  draw  our  conclu¬ 
sions  too  strongly  ;  least  of  all  when  they  involve  a  com- 

1  One  of  the  best  documents  on  this  subject — Waddington’s  Report  of 
1880 — is  reproduced  in  full  in  the  English  Parliamentary  Committee  Report 
of  1882,  Appendix,  No.  31. 

a  See  Railroad  Gazette ,  March  6,  1885. 


202 


RAILROAD  TRANSPORTATION. 


parison  between  different  nations.  The  failure  to  lower 
average  rates  is  probably  due  largely  to  the  failure  to  de¬ 
velop  long-distance  traffic,  as  other  nations  have  developed 
it.  Now,  this  lack  of  long-distance  traffic  is  doubtless  in 
large  measure  a  result  of  the  railroad  policy ;  but  in 
another  sense,  it  is  an  independent  fact  by  itself,  and  the 
cause  of  the  railroad  policy  instead  of  its  result.  Of  all 
nations  on  the  highest  industrial  plane,  France  probably 
depends  least  upon  her  long-distance  traffic.  By  a  series 
of  causes,  chiefly  natural,  her  industry  has  been  so  diversi¬ 
fied  that  she  can,  to  a  large  extent,  live  within  herself.  In 
some  respects  she  pays  dearly  for  the  privilege  ;  in  other 
respects  she  has  a  great  advantage.  The  slowness  in 
certain  matters  of  railroad  development  is  but  one  mani¬ 
festation  of  this  general  character  of  French  industry. 
We  have  perhaps  done  quite  as  badly  in  going  to  the 
opposite  extreme.  We  have  done  wonders  in  the  way  of 
reducing  rates,  but  the  through  freight  has  had  the  lion’s 
share  of  this  benefit.  Even  when  the  local  shipper  gets 
an  actual  reduction,  he  may  be  relatively  worse  off  than 
before.  What  the  competition  for  through  freight  is 
doing  for  our  railroad  interests  we  know  only  too  well. 
The  average  rates  per  ton-mile  are  any  thing  but  an  in¬ 
fallible  sign  concerning  a  railroad’s  wisdom  or  a  state’s 
prosperity. 


CHAPTER  XI. 


THE  RAILROAD  SYSTEMS  OF  CENTRAL  EUROPE. 

Lack  of  system  in  Germany  at  the  outset — Gradual  acquisition  of  railroad 
property  by  Prussia — Growth  of  private  lines,  1866-73 — Failure  to 
establish  an  imperial  railroad  system — Purchase  of  private  roads  by  the 
Prussian  Government — Austrian  history — Mistaken  lines  of  policy — The 
crisis  of  1873 — Extension  of  state  ownership  in  recent  years — Early 
enterprise  of  the  Belgian  Government — Period  of  active  competition  of 
private  railroads — Their  absorption  by  the  state  system — Results  of 
Belgian  railroad  management. 

M.  M.  v.  Weber.  Nationalitat  und  Eisenbahnpolitik,  Vienna,  1876. 

E.  Sax.  Die  Eisenbahnen,  Vienna,  1879,  PP-  491-526. 

In  this  chapter,  as  in  chap,  x.,  much  of  the  material  was  inaccessible  in 
its  original  form,  and  had  to  be  taken  at  second-hand  from  journals  like  the 
Archiv  fiir  Eisenbahnwesen  (Berlin),  Zeitung  des  Vereins  Deutscher  Eisen- 
bahn-  Verwaltungen  (Berlin)  Oesterreischische  Eisenbahn-Zeitung  (Vienna), 
Moniieur  des  Interets  Maieriels  (Brussels). 

The  contrast  between  Germany  and  France,  so  manifest 
in  almost  every  department  of  history,  could  not  fail  to 
show  itself  in  the  railroad  systems  of  the  two  countries. 
That  of  France  was  planned  under  a  carefully  devised 
scheme.  It  radiated  from  Paris  as  a  centre.  It  formed  a 
national  net-work,  where  each  part  was  subordinated  to 
the  whole.  That  of  Germany,  on  the  other  hand,  grew 
up  without  any  comprehensive  plan.  The  first  lines  did 
not  even  come  into  communication  with  Berlin.  They 
were  built  as  local  lines  to  subserve  local  interests.  This 
was  largely  due  to  the  political  constitution  of  the  coun¬ 
try.  The  smaller  states  pursued  their  own  way,  each  for 


203 


204  RAILROAD  TRANSPORTATION. 

itself,  without  regard  to  national  development.  They 
were  strong  enough  financially  to  adopt  the  policy  of  state 
ownership  and  carry  it  out  consistently.  They  actually 
succeeded  in  doing  what  so  many  of  our  country  towns 
tried  to  do  a  few  years  ago  by  municipal  subscriptions  ; 
that  is,  they  secured  railroad  construction  for  the  sake  of 
local  interests,  where  mere  business  considerations  would 
not  have  caused  railroads  to  be  built.  They  thus  obtained 
a  remarkably  uniform  development  of  lines  all  over  the 
country. 

But  it  was  not  from  these  small  states  that  a  national 
railroad  policy  was  to  come.  The  political  ties  which 
bound  them  were  too  loose  to  admit  of  common  action  in 
this  matter.  There  was,  it  is  true,  a  sort  of  federation  of 
railroads  established,  the  “  Verein  Deutscher  Eisenbahn- 
Verwaltungen.”  This  did  extremely  good  work  ;  but  it 
dealt  with  matters  of  railroad  administration  rather  than 
railroad  policy  in  the  wider  sense.  There  was  but  one 
source  whence  a  national  railroad  policy  could  arise,  just 
as  there  was  but  one  source  whence  political  unity  could 
come.  The  two  movements  centred  in  Prussia. 

The  original  idea  of  the  Prussian  legislators  seems  to 
have  been  a  combination  of  the  French  scheme  of  regu¬ 
lated  monopoly  with  the  exploded  English  notion  of  com¬ 
petition  of  different  owners  of  rolling  stock  on  the  same 
line  of  rails.  The  law  of  1838  explicitly  recognized  rail¬ 
road  monopoly  rights,  protecting  them  for  thirty  years 
against  parallel  railroad  construction.  But  the  scheme 
was  never  consistently  carried  out  as  it  was  in  France. 

About  1842  the  policy  of  subsidies  came  into  vogue  ; 
not  on  the  French  system,  but  in  the  form  of  guarantees 
of  interest.  With  these  guarantees  there  was  a  further 
proviso,  that  if  the  state  was  compelled  to  advance  money 


RAILROAD  SYSTEMS  OF  CENTRAL  EUROPE.  20$ 


in  this  way,  it  might,  after  a  certain  length  of  time,  under¬ 
take  running  the  road  itself.  Other  roads  were  indirectly 
countenanced  by  the  purchase  of  stock  on  the  part  of  the 
state,  which  was  thus  gradually  carried  on  in  the  direction 
of  railroad  ownership.  The  first  absolutely  state-built 
and  state-managed  road  was  one  from  Berlin  toward  the 
Russian  frontier,  begun  in  1848.  This  was  built  on  mili¬ 
tary  grounds,  without  much  regard  to  business  considera¬ 
tions.  Down  to  i860  the  government  continued  building 
a  few  roads,  and  at  the  same  time  quietly  purchased  a 
good  deal  of  railroad  stock,  devoting  to  that  purpose  the 
proceeds  of  a  special  railroad  tax. 

With  the  advent  of  Bismarck  to  power  in  1861,  military 
matters  thrust  industrial  ones  into  the  background.  Even 
the  railroad  tax  was  diverted  to  political  purposes.  The 
consolidation  of  Germany  into  one  nation  by  the  wars  of 
1866  and  1870  created  new  lines  of  traffic,  and  a  demand 
for  new  railroads.  These  were  largely  built  by  private 
companies.  The  Prussian  administration  was  too  much 
occupied  with  other  social  and  political  questions  to  give 
the  railroad  problem  its  final  solution,  or  even  to  decide 
upon  its  own  ultimate  policy  in  the  matter.  The  time 
preceding  the  crisis  of  1873  was  a  period  of  active  railroad 
speculation,  in  which  the  state  itself  was  a  participant. 
In  Prussia,  as  in  Belgium,  state  railroads  were  simply 
roads  owned  by  the  state,  but  managed  on  the  same  prin¬ 
ciples,  and  with  the  same  abuses,  as  competing  private 
roads. 

This  was  the  condition  of  things  down  to  1874.  At  that 
time  the  German  railroad  system  was  a  “mixed  ”  one  in 
the  fullest  sense  of  the  term.  The  small  states  had  owned 
their  own  roads,  in  large  measure,  from  the  outset.  Pri¬ 
vate  enterprise  had  improvised  connections  and  built 


20  6 


RAILROAD  TRANSPORTATION. 


through  lines.  Prussia  owned  about  one  third  of  the  rail¬ 
roads  within  her  borders.  Some  she  had  built  for  military 
or  political  necessity,  some  she  had  acquired  in  the  way  of 
business,  some  she  had  assumed  when  she  annexed  the 
states  that  owned  them. 

Bismarck  was  far  from  satisfied.  He  wanted  to  see  a 
consistent  state  railroad  system,  and  that  not  in  the  hands 
of  the  individual  governments,  large  or  small,  but  in  the 
hands  of  the  imperial  power  itself.  He  seems  to  have  had 
this  idea  in  mind  from  the  first.  The  power  of  the  empire 
to  regulate  railroads  was  established  and  defined  in  a 
series  of  articles  (§  41-47)  of  the  imperial  constitution. 
This  was  in  1871.  In  1873  a  railroad  commission  (or 
rather  “  Railroad  Department,”  Eisenbahnamt )  was  estab¬ 
lished,  consisting  of  seven  members,  having  power  to  carry 
out  the  provisions  of  the  constitution — among  which  was 
one  providing  for  the  regulation  of  rates, — to  secure  pub¬ 
licity,  and  to  do  away  with  abuses.  By  this  authority  a 
great  deal  has  been  done  to  secure  unity  in  matters  of 
construction,  signals,  liability,  etc.  In  the  matter  of  rates 
it  has  done  comparatively  little.  This  is  practically  not 
under  the  control  of  the  empire,  but  of  the  individual 
states.1 

The  imperial  authorities  wanted  to  do  more  than  control 
the  railroads ;  they  wanted  to  own  and  manage  them. 
The  first  step  in  that  direction  was  taken  in  the  years  1870 
and  1871.  When  Alsace  and  Lorraine  passed  under 
German  sovereignty,  the  German  Empire,  as  such,  was 

J  We  must  not  confuse  the  Prussian  Government  with  that  of  the  German 
Empire,  merely  because  the  King  of  Prussia  is  ex-officio  Emperor  of 
Germany.  If  the  Governor  of  New  York  were  ex-officio  President  of  the 
United  States,  the  administrations,  National  and  State,  might  still  remain 
entirely  distinct,  with  distinct  spheres  and  rights.  Such  is  actually  the  case 
in  Germany. 


RAILROAD  SYSTEMS  OF  CENTRAL  EUROPE.  20 7 

the  only  authority  to  take  charge  of  the  railroads  of  those 
provinces,  which  could  no  longer  remain  under  the  man¬ 
agement  of  the  French  company  to  which  they  had 
hitherto  belonged.  This  was  but  a  beginning.  Four 
years  afterward  there  was  a  strong  agitation  in  favor  of 
transferring  all  railroads  in  all  parts  of  Germany  into  the 
hands  of  the  empire.  The  project  met  with  favor  in 
Prussia;  but  in  other  parts  of  Germany,  especially  in 
Bavaria  and  Saxony,  the  states-rights  feeling  was  too 
strong,  and  the  plan  was  after  a  time  abandoned. 

Foiled  in  his  purpose  of  a  German  state  system  of  roads, 
Bismarck  attempted  to  widen  the  Prussian  state  system  ; 
and  here  he  succeeded  completely.1  In  1878  there  were 
only  about  three  thousand  miles  of  state-owned  roads; 
two  thousand  miles  more  were  owned  by  private  com¬ 
panies  but  managed  by  the  state,  while  six  thousand 
miles,  or  more  than  half,  were  under  private  ownership 
and  management  both.  The  state  roads  themselves  were 
rendered  less  powerful  than  the  mere  figures  would  indi¬ 
cate,  because  they  were  divided  into  two  practically 
unconnected  systems,  the  Eastern  and  the  Western. 
This  defect  was  remedied  in  the  autumn  of  1879,  when 
the  government,  by  a  series  of  purchases,  obtained  control 
of  two  important  east-and-west  trunk  lines  connecting 
Berlin  with  Cologne.  At  the  same  time  a  number  of 
other  roads  passed  into  government  hands.  The  tendency 
was  too  strong  to  be  resisted  by  the  private  companies. 
By  the  close  of  the  year  1881  the  government  virtually 
owned  seven  thousand  miles  of  road,  besides  managing 
two  thousand  miles  more ;  while  there  were  little  more 
than  three  thousand  miles  left  in  the  hands  of  private 

1  A.  v.  d.  Leyen  :  Die  Durchfiihrung  des  Staatsbahnsystems  in  Preussen. 
Jahrb.  f.  Gesetzgebung  (1883),  vii.,  2,  89-139. 


208 


RAILROAD  TRANSPORTATION. 


companies.  Two  of  these  companies  were  financially  very 
strong— the  “  Anhalt  ”  line  connecting  Berlin  with  the 
south,  and  the  Hamburg  line  toward  the  northwest.  But  the 
government  was  resolved  not  to  leave  its  work  incomplete. 
The  Anhalt  road  was  purchased  in  1882,  the  Hamburg 
road  in  1884.  There  are  now  in  Prussia  about  13,000 
miles  of  state  roads  and  only  1,000  miles  of  private  roads. 

The  prices  paid  were  liberal,  and  sometimes  extremely 
high.  The  stockholders  of  the  Berlin-Hamburg  Company 
secured  an  income  of  over  16  per  cent.1 2  on  the  investment ; 
this  was  decidedly  the  highest  price  paid  for  any  road. 
The  purchase  was  generally  made  by  exchanging  for  the 
securities  of  the  roads  Prussian  4-per-cent  bonds  in  such 
amounts  as  should  give  the  holders  about  the  same  in¬ 
come  that  they  would  presumably  have  received  had  the 
roads  remained  in  private  hands.  There  was  no  com¬ 
pulsion  exercised.  The  government  offered  prices  which 
made  it  worth  while  for  the  companies  to  sell.  The 
government  had  a  technical  right  to  take  the  property  at 
a  valuation,  but  it  seemed  better  to  make  a  slight 
pecuniary  sacrifice  rather  than  incur  the  odium  of  enfor* 
cing  this  right. 

Prussia  is  now  the  typical  example  of  state  railroad 
ownership.  Of  Prussian  railroad  employes,  nearly  80,000 
are  regularly  appointed  members  of  the  civil  service,  with 
special  rights  and  duties  as  such.  The  railroads  are  made 
to  subserve  political  and  military  purposes  quite  as  much 
as  commercial  ones.  To  examine  and  pass  judgment 
upon  Prussian  management  or  Prussian  rates,  is  virtually 
to  pass  judgment  on  state  railroad  ownership  as  a  system. 

Railroad  development  in  Austria3  has  been  more  or  less 

1  In  conjunction  with  a  cash  payment,  which  makes  the  actual  return 
about  17  per  cent. 

2  Th.  Haberer  :  “  Geschichte  des  Eisenbahnwesens,”  Vienna,  1884. 


RAILROAD  SYSTEMS  OF  CENTRAL  EUROPE .  209 


closely  connected  with  that  in  Germany  ;  but  the  changes  in 
Austria’s  political  history,  and  the  weakness  of  her  treasury, 
have  made  her  policy  much  less  consistent.  When  rail¬ 
roads  were  first  invented,  Austria  was  the  home  of  bigoted 
conservatism.  The  Austrian  court  and  statesmen  looked 
upon  the  new  contrivance  with  a  distrust  which  was  from 
their  point  of  view  well  founded.  Such  rapid  movement 
seemed  to  savor  of  dangerous  radicalism,  not  to  say  revo¬ 
lution.  The  Emperor  in  1836  made  up  his  mind  to  sign  a 
railroad  charter  only  on  the  somewhat  dubious  ground 
that  “  the  thing  can’t  maintain  itself,  anyhow.”  1 

Railroads  insisted  on  coming  whether  monarchical 
governments  liked  them  or  not ;  and  they  did  so  much 
good  when  they  came  that  the  government  soon  decided 
that  they  were  a  good  thing,  and  gave  them  paternal 
assistance,  either  in  the  form  of  guarantees  of  interest  or 
of  direct  state  construction.  This  period  in  Austria  lasted 
from  about  1840  to  1848  ;  it  was  a  time  of  active  railroad 
building.  The  revolution  of  1848  and  the  Hungarian  war 
threw  all  industry  into  confusion.  Under  these  circum¬ 
stances  Austria  pursued  exactly  the  opposite  policy  to 
that  of  Prussia.  The  Prussian  Government  tried  to  help 
railroads  by  buying  them  at  low  prices ;  the  Austrian 
Government,  by  selling  them  at  low  prices.  There  can  be 
little  doubt  that  the  Austrian  Government  during  this 
period  was  greatly  influenced  by  the  example  of  F ranee, 
and  desired  not  to  own  its  roads,  but  to  have  them  owned 

1  We  must,  however,  give  Austria  the  credit  of  being  the  first  country  to 
enact  a  general  railroad  law.  It  provided  for  a  detailed  form  of  previous 
application  ;  for  the  time  limits  of  the  charter  ;  for  publicity  of  rates  ;  and 
for  reduction  in  rates  in  case  profits  exceeded  fifteen  per  cent.  It  guaranteed 
the  company  against  the  construction  of  parallel  lines.  This  law  was  passed 
in  1838.  Prussia  passed  a  somewhat  similar  law  a  few  months  later.  Eng¬ 
land  had  nothing  of  the  kind  till  1845. 


210 


RA ILROAD  TRA  NSPOR  TA  TION. 


and  built  by  private  companies,  in  systems  radiating  from 
Vienna,  as  the  French  lines  radiated  from  Paris. 

The  system  was  one  which  did  not  bear  transplanting. 
It  had  grown  up,  and  had  been  found  serviceable  in 
France,  because  France  was  so  closely  knit  together,  and 
centred  around  Paris  so  completely.  In  Austria  it  was 
quite  different.  The  country  consists  of  many  distinct 
states,  not  even  bound  together  by  ties  of  language  or  of 
race.  That  Vienna  is  the  seat  of  government  for  them 
all,  is  scarcely  more  than  a  political  accident.  The  condi¬ 
tions  of  trade  are  in  many  respects  like  those  of  the 
United  States.  They  have  their  international  cattle 
trade  and  grain  trade  ;  their  combined  rail  and  water 
routes  on  export  business  ;  their  inter-state  commerce 
troubles,  and  their  Granger  troubles.  They  have  a  water 
route  of  dominant  importance — the  Danube — competing 
with  their  east  and  west  trunk  lines.  With  these  and 
many  other  through-business  complications,  it  is  easy  to 
see  that  the  example  of  France  could  only  prove  mislead¬ 
ing.  They  succeeded  in  appropriating  some  of  its  evil 
results  with  none  of  its  good  ones.  The  state  sold  many 
lines  in  1853  at  about  half  their  cost  of  construction.  So 
far  was  this  from  stimulating  the  enterprise  of  private 
companies,  that  in  1859  some  of  the  most  important  con¬ 
necting  links  in  Austria’s  trunk-line  system  were  but  half 
built.  Her  decisive  defeat  by  France  in  that  year  was 
largely  due  to  the  unreadiness  of  her  railroad  system ;  and 
the  same  thing  made  itself  felt  to  a  less  extent  in  the  war 
with  Prussia  in  1866. 

The  period  of  listlessness,  which  ended  about  the  time 
of  the  war  with  Prussia,  was  followed  by  a  period  of  wild 
speculation,  which  did  not  end  until  the  crisis  of  1873. 
In  spite  of  stringent  legal  provisions,  the  same  abuses 


RAILROAD  SYSTEMS  OF  CENTRAL  EUROPE.  21  I 


manifested  themselves  in  Austria  that  had  been  found  in 
other  countries  with  fewer  laws.  Construction  companies 
were  numerous,  and  left  such  a  bad  name  that  to  call 
a  man  “  a  constructor”  is  in  Germany  far  more  oppro¬ 
brious  than  to  call  him  a  liar.  One  example  will  suffice 
to  show  the  recklessness,  or  rather  light-headedness,  of 
Austrian  speculation  at  this  time.  It  is  all  the  more 
noticeable  because  Haberer,  in  his  “  Railroad  History,” 
relates  it  as  if  it  were  the  most  natural  thing  in  the 
world. 

“The  crisis  of  1873  brought  to  light  a  serious  defect  in 
Austrian  law.  While  one  concern  after  another  went 
under,  the  holders  of  bonds  or  debentures  were  resting 
quietly  in  the  belief  that  their  interests  were  secured. 
But  when  one  and  another  of  these  roads  became  unable 
to  pay  their  interest,  the  matter  was  looked  into  thor¬ 
oughly,  and  it  was  found  that  the  whole  debt  was  unse¬ 
cured  ;  for  although  there  were  nominal  mortgages  on  the 
property,  these  mortgages  had  no  legal  authority,  because 
they  were  not  recorded  in  the  manner  prescribed  bylaw.”  1 

The  prostration  which  followed  the  crisis  of  1873  al¬ 
most  forced  Austria  into  a  policy  of  active  state  interfer¬ 
ence.  This  soon  took  the  direction  of  extension  of  state 
ownership,  In  Hungary  this  policy  had  never  been  com¬ 
pletely  abandoned.  In  Austria  itself  it  had  been  out  of 
favor  for  twenty  years  ;  and  this  fact,  combined  with  the 
not  over-prosperous  condition  of  the  Austrian  treasury, 
made  it  impossible  to  move  rapidly.  Three  quarters  of 

1  Haberer  :  “  Geschichte  des  Eisenbahnwesens,”  p.  123.  Inasmuch  as  the 
whole  railroad  indebtedness  of  Austria  seems  to  have  suffered  from  this  law, 
it  might  be  regarded  as  a  discovery  of  some  importance.  To  be  sure,  there 
was  a  paternal  government  at  hand  to  set  it  all  right.  But  if  this  repre¬ 
sents  Austrian  ways  of  doing  business,  Vienna  ought  to  offer  a  good  field  for 
some  enterprising  American  lawyers. 


212 


RAILROAD  TRANSPORTATION. 


the  lines  are  still  in  the  hands  of  private  companies ;  and 
although  matters  unquestionably  tend  in  the  direction  of 
state  management,  it  is  as  yet  impossible  to  say  how  far 
this  tendency  will  go.  Still  less  is  it  possible  to  pass  any 
judgment  on  the  results  of  the  policy  upon  rates,  or  upon 
national  development.  It  is  all,  or  nearly  all,  a  matter  of 
the  future.  Even  in  Prussia  the  results  are  yet  far  from 
definite.  If  we  wish  to  see  a  state  railroad  system  which 
has  a  past  as  well  as  a  present  and  future,  we  must  turn 
from  Germany  to  Belgium. 

Of  all  countries  in  the  world  Belgium  probably  offered 
the  best  advantages  for  a  state  railroad  system.  The 
industry  of  the  country  was  active  and  varied.  Of  a 
large  body  of  local  traffic  its  railroads  were  thus  sure ;  and 
they  lay  in  a  position  to  secure  a  large  share  of  the  tran¬ 
sit  trade  between  England  and  Germany.  There  was 
almost  no  possibility  of  mistake  in  locating  the  main  rail¬ 
roads.  The  centres  of  industry  were  well  defined;  the 
main  lines  of  trade  almost  equally  well  defined.  The 
construction  of  railroads  was  easy,  a  large  part  of  the 
country  being  nearly  level ;  almost  too  easy,  in  fact,  for  the 
very  facility  of  construction  offered  an  inducement  to 
competing  or  parallel  railroads.  The  government  was 
admirably  suited  for  railroad  supervision  and  manage¬ 
ment.  It  was  enlightened  and  progressive,  sufficiently 
centralized  to  be  strong,  yet  popular  enough  to  feel  popu¬ 
lar  demands.  The  country  was  large  enough  to  have  an 
independent  policy,  not  so  large  that  local  interests 
would  be  sacrificed  to  that  policy.  Its  credit  was  excel¬ 
lent,  so  that  it  had  no  difficulty  in  raising  whatever 
money  was  needed  for  public  works. 

Although  Belgium  was  on  the  direct  line  between 
Germany  and  London,  a  large  part  of  the  traffic  had  gone 


RAILROAD  S Y STEMS  OF  CENTRAL  EUROPE.  213 


via  Holland,  because  of  the  easy  navigation  of  the  Rhine 
to  its  very  mouth.  The  substitution  of  rail  for  water  as  a 
means  of  communication,  gave  Belgium  the  opportunity 
to  compete  for  this  traffic.  The  Belgian  Government  was 
quick  to  avail  itself  of  this  opportunity.1  King  Leopold 
was  familiar  with  England  and  English  business;  he  fore¬ 
saw  the  probable  future  of  the  railroad,  and  he  was  all  the 
more  in  a  hurry  to  act,  from  the  fear  that  certain  hated 
Dutch  capitalists  might  get  the  start  of  him.  Railroad 
work  was  actively  begun  as  early  as  1833.  The  govern¬ 
ment  chose  the  main  lines  of  traffic,  and  built  its  roads 
there ;  from  Antwerp  on  the  north  to  the  iron  and  coal 
regions  on  the  south  ;  from  Liege,  near  the  German  fron¬ 
tier,  to  Ostend,  the  most  available  point  for  shipment  for 
England.  Private  companies  were  allowed  to  build  lines 
whenever  the  state  did  not  choose  to  undertake  the 
work ;  they  thus  furnished  a  system  of  branches  and  con¬ 
nections.  In  the  crisis  of  1848  the  government  went  so 
far  as  to  subsidize  some  of  these  private  lines.  The  sys¬ 
tem  as  originally  designed  was  virtually  complete  in  1850. 

The  early  arrangements  were  admirable  for  the  time  in 
which  they  were  devised.  But  they  were  not  changed  to 
keep  pace  with  progress  elsewhere.  The  Belgian  system 
of  reports  and  statistics  when  first  adopted  was  the  best 
in  the  world ;  a  generation  later  it  was  one  of  the  worst. 
In  their  engineering  arrangements,  machine  shops,  etc., 
what  was  at  first  admirable  precision  soon  became  intoler¬ 
able  old-fogyism.2  The  same  conservatism  for  a  time 
showed  itself  in  the  matter  of  rates.3  Down  to  1853  there 

1  Adams  :  Railroads,  pp.  94  ff. 

2  Report  of  le  Hardy  de  Beaulieu,  Section  Centrale,  1SS0. 

3  Charles  Baum  ( Annales  des  Fonts  et  Chausse'es,  March,  1SS2)  furnishes 
strong  testimony  as  to  the  facts,  though  he  is  far  from  holding  the  system  of 
state  management  responsible. 


214 


RAILROAD  TRANSPORTATION. 


was  no  system  of  charges  adapted  to  the  wants  of  busi¬ 
ness ;  only  the  crudest  kind  of  pro-rata  tariff,  with  little 
or  no  classification. 

A  radical  change  in  this  respect  was  made  at  the  time 
when  the  competition  of  private  companies  began  to  make 
itself  felt.  The  state  stopped  building  railroads  in  1850. 
Private  companies  began  building  faster  than  ever.  For 
nearly  twenty  years  the  government  system  remained  all 
but  stationary,  with  a  length  of  about  350  miles.  The 
private  railroads  increased  from  less  than  200  miles  in 
1850  to  700  in  i860,  and  1,400  in  1870.  This  growth  of 
private  railroads  was  accompanied  by  their  consolidation 
into  powerful  systems.  Instead  of  being  mere  local 
branches  or  feeders  to  the  state  lines,  they  had  now 
become  rivals  for  the  same  through  traffic  ;  not  quite  so 
well  situated,  but  strong  enough  to  compete  actively. 
With  the  year  1856  began  a  period  of  railroad  wars.  So 
far  from  exercising  a  dominant  influence  in  railroad 
tariffs,  the  state  was  for  the  time  being  completely  power¬ 
less  against  the  current  of  events.  It  abandoned  schedule 
rates,  and  had  recourse  to  personal  discrimination  and  to 
special  contracts  of  every  kind.1  It  is  probable  that  in 
these  respects  the  state  was  a  worse  offender  than  the 
private  companies  themselves. 

It  is  a  curious  fact  that  in  any  such  competition  the 
state  is  not  stronger  than  private  companies,  but  weaker. 
Theoretically,  it  may  have  the  power  to  forbid  private 
companies  engaging  in  such  competition.  Practically, 
public  opinion  will  not  allow  it  to  exercise  that  power. 
Nor  can  the  state  railroads  exercise  a  dignified  reserve.  If 


1  The  government  railroads  themselves  granted  special  rates  to  prevent 
people  from  using  the  government’s  own  canals.  See  Rep.  of  Joint  Select 
(Parliamentary)  Committee  of  1872,  App.,  p.  787. 


RAILROAD  SYSTEMS  OF  CENTRAL  EUROPE.  21 5 

private  railroads  are  run  to  make  money,  and  succeed  in 
doing  it,  the  state  railroads  must  be  run  to  make  money 
too,  or  else  the  authorities  will  have  to  face  the  criticism 
of  an  indignant  public.  And  in  this  money-making  race 
it  is  impossible  for  the  government  to  have  the  same  quick 
elasticity  of  action  as  a  private  company.  Thus  it  hap¬ 
pened  that  the  competition  in  Belgium  was  quite  even. 
The  state  had  somewhat  better  routes ;  but  the  advan¬ 
tages  possessed  by  private  companies  in  a  business  fight 
just  about  offset  this  difference. 

During  the  times  of  active  railroad  war,  the  lowering  of 
rates,  especially  for  long  distances  and  for  low-class  goods, 
was  astonishingly  rapid.  The  results  obtained  in  Belgium 
in  the  years  1861-65  were  even  more  remarkable  than 
those  reached  in  the  United  States  some  years  later.  The 
average  freight  charge  per  ton-mile  was  reduced  to  about 
1.3  cents  ;  the  average  rate  per  passenger-mile  was  even 
lower.  The  stress  of  competition  developed  such  active 
business  management  among  the  railroads  that  they  were 
able  to  work  with  profit  at  these  rates. 

Yet  this  state  of  things,  while  seemingly  good,  was  in¬ 
tolerable  to  the  government.  The  competition  of  private 
companies  gave  it  no  chance  for  an  independent  policy. 
The  political  success  was  not  what  was  generally  sup¬ 
posed  by  the  outside  world.  To  Americans,  the  condition 
of  the  Belgian  system  at  that  time  was  known  chiefly 
through  the  reports  of  the  Massachusetts  Commission, 
and  this  commission,  without  the  least  intentional  unfair¬ 
ness,  was  disposed  to  look  at  all  these  matters  in  a  rose- 
colored  light,  because  they  were  desirous  that  Massachu¬ 
setts  should  follow  the  example  of  Belgium.1  They 

1  Massachusetts  Reports  ii. ,  52,  53  ;  iv.,  67-70,  80,  81.  Six  years  later, 
Mr.  Adams  (“  Railroads,”  p.  99)  very  candidly  qualifies  the  views  expressed 
in  those  reports. 


2l6 


RAILROAD  TRANSPORTATION. 


therefore  accepted  the  Belgian  authorities’  reports  of  their 
own  work,  without  subjecting  them  to  criticism — a  dan¬ 
gerous  thing  to  do.  The  fact  is  that  the  Belgian  state 
railroad  system,  during  the  time  of  active  competition, 
was  occupied  with  something  else  than  questions  of  pub¬ 
lic  policy.  It  was  occupied  with  making  money.  It  was 
a  responsible  and  well-conducted  company,  managed  on 
business  principles.  It  differed  from  other  companies 
only  in  the  fact  that  its  revenues  accrued  to  the  state,  and 
its  officials  held  their  appointments  from  the  state. 

When  the  government  wanted  to  obtain  real  influence 
as  a  railroad  owner,  it  bought  up  most  of  the  competing 
lines,  and  made  long  pooling  arrangements  with  the  re¬ 
mainder.  This  began  in  1870;  the  largest  purchases  were 
made  about  1873.  In  1874  the  government  owned  more 
than  half  the  mileage  of  the  country;  in  1880  it  owned 
two  thirds  ;  now  it  owns  about  three  quarters.  The  Bel¬ 
gian  system  of  1885  is  a  totally  different  thing  from  the 
Belgian  system  of  1869. 

In  judging  the  railroad  policy  of  Belgium  by  its  results, 
all  must  unite  in  admitting  that  they  are  in  many  respects 
extraordinarily  good.  What  their  average  rates  are,  we 
have  already  seen.  The  passenger  rates  are  lower  than 
anywhere  else  in  the  world,  except,  perhaps,  on  some  East 
Indian  railroads.  The  freight  rates  are  much  lower  than 
anywhere  else  in  Europe.  Nominally  they  are  about  the 
same  as  in  the  United  States.  Practically  they  are  lower 
for  almost  any  given  service,  because  Belgium  does  not 
have  the  enormous  long-distance  traffic  which  brings 
down  the  average  in  the  United  States. 

Their  classification  is  also  excellent.  They  have  now 
got  matters  into  such  shape  that  the  schedules  themselves 
(which  go  quite  into  details)  furnish  a  system  of  rates 


RAILROAD  SYSTEMS  OF  CENTRAL  EUROPE.  21 7 


adapted  to  the  wants  of  different  lines  of  business  and  of 
different  localities.  What  their  rates  have  done  for  the 
development  of  business  is  strikingly  seen  in  the  history 
of  the  port  of  Antwerp,  which  is  rapidly  outstripping  the 
somewhat  similarly  situated  French  port  of  Havre — a  dif¬ 
ference  which  is  thought  to  be  largely  due  to  the  different 
railroad  policy  of  the  two  countries. 

It  is  also  true  that  they  make  a  great  deal  of  use  of 
their  investment.  The  average  car-load  is  higher  than  in 
either  Germany  or  France,  though  the  construction  is  the 
same.  The  high  percentage  of  expenses  to  earnings, 
which  is  often  quoted  against  them,  is  really,  prima  facie , 
in  their  favor.  If  a  country  where  the  state  has  a  virtual 
monopoly  of  railroads  shows  too  small  a  percentage  of 
operating  expenses,  it  gives  good  ground  for  the  belief 
that  rates  are  unnecessarily  high,  and  that  industrial  inter¬ 
ests  are  being  sacrificed  to  financial  ones. 

On  the  other  hand,  it  would  be  a  mistake  to  use  these  re¬ 
sults  as  a  strong  argument  in  favor  of  state  management. 
The  progress  was  made  during  a  period  of  active  competi¬ 
tion,  when  private  companies  took  the  lead.  The  founda¬ 
tions  were  laid  in  1853,  when  competition  was  beginning. 
The  system  developed  itself  most  rapidly  in  1861-65, 
when  competition  was  at  its  height.  Since  the  state  has 
purchased  rival  lines,  and  has  had  a  virtual  monopoly, 
there  seems  to  have  been  a  diminution  of  activity,  and  a 
tendency  toward  slackness  of  management.  There  has 
been  a  lowering  of  profits  without  corresponding  change 
of  rates.  Great  complaints  are  made  of  the  lack  of  cars 
where  they  are  wanted.  Much  more  serious  charges  are 
made  by  certain  high  authorities  like  Le  Hardy  de  Beau¬ 
lieu.1  He  asserts  that  the  connection  between  railroads 


1  Reports,  Section  Centrale,  1880,  1SS1. 


218 


RAILROAD  TRANSPORTATION. 


and  politics  has  produced  distinctly  bad  results ;  that 
there  has  been  a  multiplication  of  forms  and  offices  of  no 
use  in  actual  business,  and  that  there  have  been  serious 
manipulations  of  accounts  to  make  an  unduly  favorable 
showing  for  the  government.  At  this  distance  it  is  im¬ 
possible  to  investigate  these  charges;  but  they  have  been 
made  in  official  form  by  one  of  the  best  authorities  in 
Belgium. 

While  not  withholding  the  freest  praise  from  the  Bel¬ 
gian  system,  we  may  fairly  ascribe  much  of  its  success  to 
other  causes  than  enlightened  state  management  or  delib¬ 
erate  public  policy. 

The  railroad  history  of  other  European  countries  is 
for  the  most  part  of  much  less  importance.1  Some — like 
Denmark,  Norway,  or  Sweden — show  a  tolerably  well-de¬ 
fined  policy,  but  not  an  extensive  or  important  system  of 
railroads.  Others — like  Russia,  Spain,  or,  in  some  senses, 
Switzerland, — have  important  lines,  but  no  well-defined 
principles  of  management.2 

The  case  of  Italy  stands  by  itself,  and  must  be  treated 
separately.  The  Italian  railroads,  regarded  simply  as  rail¬ 
roads,  will  not  compare  in  importance  with  those  of  Ger¬ 
many  or  France.  Nor  has  railroad  economy  and  adminis¬ 
tration  been  developed  in  Italy  as  in  Northern  Europe. 
But  from  the  political  and  social  standpoint  the  Italian 
railroad  history  is  of  the  very  highest  interest,  and  may 
well  be  made  the  subject  of  a  separate  chapter. 

1  An  exception  should  be  made  in  the  case  of  Holland,  whose  railroad 
history,  though  less  important  than  that  of  Belgium,  presents  points  of  great 
interest. 

2  One  important  principle  has  prevailed  all  but  universally.  The  railroad 
charters  of  Continental  Europe  are  granted  only  for  a  term  of  years — not 
indefinitely. 


CHAPTER  XII. 


RAILROAD  LEGISLATION  IN  ITALY. 

Reasons  for  its  importance — Mistaken  policy  at  the  outset — Necessity  for 
government  action — Purchase  of  the  railroads  by  the  state — Questions 
regarding  their  operation — The  commission  of  1878  and  its  work — Con¬ 
clusions  unfavorable  to  state  railroad  management — Necessity  for  im¬ 
mediate  action — Lease  of  the  railroads  to  private  companies — Details 
of  the  contract — Probable  result. 

“  Atti  della  Commissione  d’lnchiesta  sull’  Esercizio  delle  Ferrovie 
Italiane.”  7  volumes,  1881. 

Cucheval-Clarigny  :  Les  Chemins  de  Fer  Italiens.  Revue  des  Deux 
Mondes,  July  1  and  15,  1884. 


It  seems  like  going  far  out  of  our  way  to  look  to  Italy 
for  lessons  in  railroad  policy.  One  might  think  that  the 
system  and  the  problems  connected  with  it  are  so  different 
from  our  own  that  only  mere  curiosity  could  lead  us  to 
study  its  workings.  As  far  as  practical  usefulness  is  con¬ 
cerned,  we  might  suppose  it  to  be  a  waste  of  time. 

We  should  make  a  great  mistake.  Events  have  oc¬ 
curred  in  Italy  in  the  last  few  years  which  have  an  import¬ 
ant  bearing  on  railroad  legislation  everywhere.  A  par¬ 
liamentary  commission  in  Italy  a  few  years  ago  held  the 
most  thorough  railroad  investigation  ever  made  in  the 
world.  As  a  result  of  their  investigation  they  concluded 
that  the  state  ought  not  to  run  railroads  ;  that  although 
Italy  owned  its  railroads,  it  ought  at  once  to  charter  large 
private  companies  to  manage  them.  And  they  have  since 
been  occupied  with  legislation  which  is  to  give  effect  to 


219 


220 


RAILROAD  TRANSPORTATION \ 


these  ideas.  It  is  the  most  decided  set-back  which  the 
growing  tendency  toward  state  railroad  management  has 
anywhere  received. 

Nothing  in  all  this  is  done  at  haphazard.  When  peo¬ 
ple  in  England  or  America  talk  about  state  railroads, 
it  is  generally  mere  guesswork.  But  in  Italy  it  is  the 
result  of  hard-won  experience.  They  have  tried  state 
railroads  and  private  railroads  both,  and  they  know  what 
they  are  talking  about.  In  fact,  they  have  tried  almost 
every  possible  relation  between  the  state  and  the  railroads. 
Each  of  three  or  four  main  systems  received  its  original 
charter  from  a  different  government.  One  derived  its 
being  from  the  Emperor  of  Austria,  another  from  the 
Pope.  Each  charter  has  been  amended  over  and  over 
again.  There  has  been  state  assistance  of  every  kind — 
•  guarantees  of  interest,  advances  of  capital,  subsidies  for 
•building,  subsidies  for  running.  The  state  has  built 
some  of  the  roads.  Others  it  has  bought  and  paid  for. 
Others  it  has  bought  and  not  paid  for.  It  has  tried 
various  forms  of  management — direct  state  action,  lease, 
and  participation  in  profits.  When  an  Italian  Commis¬ 
sion  speaks  of  the  relation  between  the  state  and  the 
railroads,  it  speaks  from  experience. 

The  conclusions  of  the  Italian  Commission  are  the 
work  of  cautious  and  responsible  men,  who  are  busy  car¬ 
rying  them  out  in  the  face  of  great  difficulties.  There  is 
no  room  for  experiments.  The  Italian  Government  finds 
it  hard  work  to  make  both  ends  meet,  and  has  no  money 
to  spend  on  mistakes.  The  railroads  are  not  very  profita¬ 
ble  at  best,  and  any  unwise  legislation  is  liable  to  bring 
them  to  the  point  where  they  cannot  be  run  at  all. 

To  understand  the  present  state  of  things  we  must  look 
back  at  Italian  railroad  history.  Up  to  1859  Italy  was 


RAILROAD  LEGISLATION  IN  ITALY. 


221 


divided  into  a  number  of  very  small  states.  As  far  as 
there  were  any  railroads  at  all,  each  state  had  its  own 
separate  system.  The  systems  were  not  merely  inde¬ 
pendent  but  isolated  ;  the  railroads  of  Tuscany  did  not 
reach  those  of  Rome,  those  of  Rome  did  not  reach  those 
of  Naples.  They  were  all  local  roads  in  the  narrowest 
sense.  The  wars  from  1859  to  1870  put  an  end  to  this 
state  of  things.  Connecting  links  were  built,  and  with 
them  came  the  inevitable  tendency  to  consolidation. 
But  this  was  not  allowed  to  take  its  natural  course. 
The  through  traffic  of  Italy  runs  from  northwest  to 
southeast ;  that  is,  it  runs  lengthwise  of  the  peninsula,  or 
parallel  to  the  central  mountain  chain.  But  the  old  politi¬ 
cal  divisions  ran  crosswise.  They  did  not  want  to  see 
their  railroads  become  intermediate  links  in  a  line  of 
through  communication  ;  they  wanted  them  to  be  inde¬ 
pendent.  And  besides  this  local  pride,  an  element  of 
national  pride  came  in  also.  The  men  who  were  planning 
through  routes  were  foreigners.  Italy  was  herself  too 
poor  to  go  into  such  enterprises  on  a  large  scale ;  but  she 
was  sensitive,  and  was  afraid  to  see  foreign  capital  gain  a 
strong  foothold  within  her  borders.  If  Rothschild  and  Tala- 
bot  had  been  allowed  to  carry  out  their  plans,  Italy  would 
probably  have  had  a  strong  and  progressive  railroad  sys¬ 
tem.  At  any  rate  it  would  have  been  organized  on  the 
natural  lines.  But  the  Italians  sacrificed  commercial 
advantage  to  sentiment — most  of  it  false  sentiment  at 
that. 

Without  going  into  details,  the  final  result  was  the  con¬ 
solidation  of  most  of  the  Italian  railroads  into  four  systems 
— the  Upper  Italian,  the  Roman,  the  so-called  Southern 
(Eastern  would  be  a  truer  title),  and — somewhat  later — 
the  system  of  Calabria  and  Sicily.  The  main  lines  of  this 


222 


RAILROAD  TRANSPORTATION. 


division  were  marked  out  as  early  as  1864,  and  have  con¬ 
tinued  without  much  change  ever  since.  The  principles 
of  consolidation  favored  by  the  state  have  been  entirely 
different  from  those  of  other  countries.  They  have  con¬ 
solidated  the  competing  lines  and  not  the  connecting 

o 

ones.  It  is  almost  as  if  New  York  had  one  united  system 
of  railroads,  Pennsylvania  a  second,  and  Ohio  a  third, 
absolutely  distinct  from  the  other  two,  and  with  only 
cumbersome  means  for  interchange  of  traffic. 

Of  course  this  was  a  wasteful  way  of  doing  things.  In 
the  first  place,  the  handling  of  the  through  business  was 
bad  ;  and,  secondly,  since  each  road  was  officered  by  men 
from  one  locality,  they  could  not  judge  when  it  was  worth 
while  to  lower  through  rates  to  develop  business.  But  if 
ever  the  railroads  of  any  country  needed  to  handle  and  de¬ 
velop  their  business  with  the  utmost  care,  it  was  the  railroads 
of  Italy.  It  spite  of  large  subsidies  from  government,  they 
found  it  extremely  difficult  to  meet  their  obligations.  In 
times  of  commercial  distress  the  conditions  of  the  charters 
had  to  be  altered  ;  sometimes  the  government  had  to 
come  to  the  rescue  with  its  credit  or  money. 

The  lines  of  Calabria  and  Sicily  were  the  worst  off. 
They  were  built  but  slowly,  and  could  not  pay  expenses. 
The  government  saw  themselves  forced  to  choose  between 
giving  up  the  development  of  this  part  of  the  country 
altogether,  or  taking  the  railroads  into  their  own  hands.  In 
1870  they  chose  the  latter  alternative  ;  owning  or  building 
the  roads  themselves,  but  running  them  through  the  me¬ 
dium  of  a  company  which  receives  its  pay  in  the  form  of  a 
percentage  of  the  gross  receipts,  all  expenses  being  paid 
by  the  state.  The  average  annual  gross  receipts  are  in  the 
neighborhood  of  $2,000  per  mile  ;  the  operating  expenses, 
some  $3,000  per  mile.  Thus  the  government  loses  a 


RAILROAD  LEGISLATION  IN  ITALY. 


223 


thousand  dollars  a  mile  annually,  besides  receiving  no 
interest  on  the  capital  invested.  And  these  things  seem 
to  improve  but  slowly. 

The  Roman  railroads  did  scarcely  better,  and  after 
many  unsuccessful  attempts  to  prop  them  up  by  pecuniary 
assistance,  the  state  in  1873  entered  upon  a  contract  to 
purchase  them.  But  the  financial  difficulties  of  the  gov¬ 
ernment  itself  were  such  that  it  was  not  until  1880  that 
arrangements  could  be  made  to  fulfil  the  contract,  nor  did 
government  take  possession  till  the  year  1882. 

The  Southern  railroad  formed  a  rather  surprising  excep¬ 
tion  to  the  general  lack  of  prosperity.  It  ran  along  the 
coast  of  the  Adriatic,  through  the  poorer  districts  of 
Italy;  it  had  no  towns  of  first-rate  importance  on  its 
main  route.  It  was  regarded  as  the  most  unpromising 
line  in  the  kingdom.  But  it  had  a  tolerably  long  line  in 
the  natural  direction  of  through  traffic,  having  formed  an 
important  part  in  the  system  proposed  by  Talabot  and 
Rothschild  in  1863  ;  and  it  was  managed  by  men  who 
knew  how  to  make  the  most  of  its  advantages.  They  had 
dared  to  take  the  lead  in  the  matter  of  tariff  reduction, 
even  when  violently  opposed  by  the  government ;  and 
they  were  rewarded  by  a  growth  of  business  which  far  ex¬ 
ceeded  their  expectations,  and  which  finally  threatened  to 
become  a  means  of  pecuniary  loss  to  them.  For  their 
subsidy  contract  was  a  somewhat  peculiar  one.  When  it 
was  made,  the  company  had  no  idea  of  ever  earning 
$5,000  per  mile  annually;  and  the  contract,  as  a  mere 
matter  of  form,  provided  that  after  the  gross  earnings  had 
reached  $5,000  a  mile  the  subsidy  should  diminish  as  fast 
as  the  gross  earnings  increased.  But  the  net  earnings 
never  would  increase  by  quite  as  large  a  sum  as  the  gross 
earnings;  the  subsidy  would  diminish  faster  than  the  net 


224 


RAILROAD  TRANSPORTATION. 


earnings  would  increase.  Thus,  every  bit  of  traffic  beyond 
§5,000  per  mile  lessened  the  amount  available  for  the  pay¬ 
ment  of  dividends.  Such  a  state  of  things  was  bad  for 
business  in  everyway,  and  could  not  last.  But  the  govern¬ 
ment  was  not  willing,  at  the  time,  to  make  any  changes  in 
the  subsidy  contract  which  should  ever  render  it  liable  to 
pay  more,  and  the  company  was  equally  set  against  any 
changes  which  might  render  it  liable  to  receive  less.  The 
only  way  open  was  for  the  government  to  buy  out  the 
company,  and  in  1874  and  1876  contracts  to  that  end 
.  were  agreed  upon,  though  subsequent  events  hindered 
their  full  execution. 

Meantime  the  government  was  being  drawn  into  ar¬ 
rangements  for  the  purchase  of  the  railroads  in  Upper 
Italy.  Here  it  was  not  on  account  of  business  complica¬ 
tions,  good  or  bad,  but  for  political  reasons.  The  countries 
of  North  Italy,  while  still  under  Austrian  rule,  had  been 
provided  with  a  tolerably  complete  system  of  railroads, 
These  were  in  the  hands  of  an  Austrian  company  which 
owned  other  lines  farther  to  the  north  and  east.  When 
part  of  its  lines  passed  under  the  Italian  Government,  the 
company  arranged  two  separate  organizations,  one  for  its 
Austrian  lines,  the  other  for  its  Italian  lines.  But  of 
course  the  same  stockholders  controlled  both  onraniza- 
tions  ;  and  the  two  nations,  which  might  at  any  moment 
become  enemies,  disliked  to  have  their  territories  connected 
by  such  intimate  financial  interests.  The  company  must 
become  Austrian  or  Italian — one  or  the  other  ;  whichever 
it  was  to  be,  the  other  part  must  be  bought  out  and 
separated  from  the  company.  Austria  felt  that  she  could 
not  buy  up  her  part  of  the  lines  and  leave  the  company 
Italian.  Italy  was  perhaps  no  better  able  than  Austria, 
but  she  was  more  enterprising  ;  she  undertook  to  buy  up 


RAILROAD  LEGISLATION  IN  ITALY. 


225 


her  part,  and  leave  the  company  Austrian.  Matters  be¬ 
gan  to  take  that  direction  in  1873.  At  the  end  of  1875 
the  arrangements  were  practically  complete. 

At  that  time  the  triumph  of  the  state  railroad  principle 
in  Italy  seemed  as  thorough  as  it  was  in  Belgium  or  in 
Germany.  For  one  reason  or  another  each  important 
company  had  been  led  to  abandon  its  chartered  rights. 
The  purchases  had  not  been  effected,  but  there  were 
contracts  which  must  soon  lead  to  purchase.  After  pur¬ 
chase  there  must  apparently  come  more  immediate  state 
interest  and  control.  Few  men  could  suspect  what  a 
different  turn  the  practical  management  of  things  was 
soon  to  take. 

It  was  a  conservative  ministry  that  had  purchased  or 
arranged  to  purchase  the  railroads  ;  and  the  ministers  who 
took  the  lead  in  this  matter,  Minghetti  and  Spaventa,  un¬ 
doubtedly  intended  that  the  state  should  run  the  railroads 
as  well  as  own  them.  But  political  changes  prevented 
their  carrying  out  this  part  of  the  programme.  They 
were  forced  to  resign  in  1876,  and  were  succeeded  by 
moderate  Radicals.  In  the  course  of  the  same  year,  after 
a  long  debate,  the  Italian  Parliament  decided  that  it  was 
unwise  for  the  state  at  that  time  to  attempt  to  manage 
its  own  railroads  directly,  and  Depretis,  the  Minister,  was 
requested  to  prepare  a  plan  under  which  the  state  rail¬ 
roads  might  be  given  over  to  private  companies  for  man¬ 
agement. 

On  what  terms  should  this  be  done  ?  This  was  a  central 
point  in  the  whole  question,  and  might  be  answered  in 
two  quite  distinct  ways.  Either  the  state  might  pay  the 
companies  for  doing  the  work,  and  take  what  was  left 
itself ;  or  the  companies  might  pay  the  state  for  the  use 
of  its  lines,  and  take  what  was  left  themselves.  In  the 


226' 


RAILROAD  TRANSPORTATION. 


first  case  the  state  would  take  the  risk,  in  the  second  case 
the  companies.  In  the  first  case  the  company  would  be 
a  mere  agent  or  employe,  in  the  second  case  a  leaseholder. 
In  the  second  case  the  state  ownership  would  be  little 
more  than  a  form,  as  far  as  concerns  its  influence  on  the 
practical  management  of  affairs.  The  partisans  of  a  state 
railroad  system  would  not  be  satisfied  with  it. 

The  Conservative  ministers  in  their  provisional  arrange¬ 
ments  had  made  contracts  of  the  first  form.  The  com¬ 
panies  were  to  be  mere  agents  to  manage  roads  at  the 
risk  of  the  government.  A  contract  in  this  sense  was 
arranged  with  the  Southern  railroad,  though  the  ministry 
fell  before  it  could  be  approved  by  Parliament.  It  pro¬ 
vided  that  the  working  company  should  be  liable  for 
operating  expenses,  including  ordinary  repairs,  but  not  for 
extraordinary  repairs  or  new  construction.  F'or  repairs 
and  maintenance  it  was  to  receive  a  fixed  allowance  per 
mile  operated  ;  for  train  expenses  (and  profits)  it  received 
an  allowance  for  each  passenger  and  each  ton  of  freight, 
for  every  mile  carried.  Further,  to  stimulate  its  activity, 
the  company  was  to  be  allowed  a  moderate  share  in  any 
increase  of  the  gross  receipts  above  a  certain  sum  men¬ 
tioned  in  the  contract. 

This  system  was  never  carried  out.  The  new  Minister, 
Depretis,  preferred  the  plan  of  leases.  He  proposed  that 
there  should  be  two  lessee  companies,  one  running  the 
roads  on  the  east  coast  and  their  connections,  the  other 
those  on  the  west  coast ;  that  the  lessees  should  own  the 
rolling  stock,  buying  at  a  valuation  what  the  state  had 
now  in  its  possession ;  that  they  should  pay  the  state 
(together)  a  fixed  minimum  rent  of  about  nine  million 
dollars :  with  a  variety  of  minor  details.  This  rental 
represented  about  two  per  cent,  on  the  cost  of  the 
roads.  It  amounted  to  thirty  per  cent,  of  the  estimated 


RAILROAD  LEGISLATION  IN  ITALY. 


227 


minimum  gross  receipts.  The  state  was  to  have  a  con¬ 
siderable  interest  in  any  excess  of  gross  receipts  above 
this  minimum. 

All  things  considered,  this  was  a  good  plan.  Many  of 
its  ideas  are  incorporated  in  the  bill  recently  passed  by 
Parliament.  But,  for  the  time  being,  Depretis  had  no 
better  luck  than  his  predecessor.  The  extreme  Radicals 
turned  out  the  moderate  Radicals  at  this  stage  of  events, 
just  as  two  years  before  the  moderate  Radicals  had  turned 
out  the  Conservatives.  And  the  extreme  Radicals  were 
so  far  under  the  influence  of  socialistic  ideas  that  the  prin¬ 
ciple  of  state  railroad  management  found  favor  with  many 
of  them.  But  they  were  not  quite  ready  for  any  action, 
and  in  July,  1878,  referred  the  whole  matter  to  a  special 
commission. 

The  Commission  of  1878  went  to  work  systematically. 
It  began  by  circulating  throughout  Italy,  among  all  classes 
of  men  who  had  any  thing  to  do  with  railroads,  a  series  of 
nearly  two  hundred  printed  questions,  to  any  or  all  of 
which  they  invited  answers,  oral  or  written.  Every  effort 
was  made  to  set  people  thinking  on  the  subject,  and  to 
receive  answers  from  all  quarters.  The  questions  were 
made  so  precise  that  a  man  who  had  one  piece  of  special 
information  might  send  an  answer  to  one  question  and  let 
the  rest  go.  An  enormous  mass  of  material  was  thus  col¬ 
lected ;  and  it  was  not  until  the  year  1881  that  the  com¬ 
mission  was  able  to  finish  its  work.  The  result  of  its 
labors  is  embodied  in  seven  quarto  volumes.  Three 
contain  the  oral  testimony ;  three  more  give  a  digest  of 
the  written  answers  and  other  material  used  ;  the  seventh 
is  the  report  itself.  In  connection  with  this  immense 
work,  lasting  between  two  and  three  years,  it  is  interest¬ 
ing  to  know  that  the  total  expense  involved  was  about 
$27,000. 


228 


RAILROAD  TRANSPORTATION. 


The  three  volumes  of  oral  testimony  are  of  no  great 
interest  outside  of  Italy.  It  is  not  so  with  the  digest  of 
materials.  This  takes  up  railroad  problems  in  their  more 
general  aspects,  making  use  of  documents  and  information 
from  almost  every  country  in  Europe.  There  are  detailed 
studies  of  the  working  of  state  railroad  management ;  of 
the  different  forms  of  government  interference ;  of  varia¬ 
tions  in  operating  expenses;  of  the  theory  of  railroad 
rates,  and  the  probable  effect  of  any  changes ;  with  num¬ 
berless  other  points  of  general  interest.  It  is  a  pity  that 
the  fact  of  its  being  written  in  Italian  makes  it  unavailable 
for  so  many  who  might  otherwise  be  glad  to  use  it.1 

The  outcome  of  these  studies  was  the  rejection  by  the 
commission  of  the  idea  that  it  was  a  proper  function  of 
the  state  to  run  railroads. 

There  had  been  no  lack  of  argument  brought  before  the 
commission  in  favor  of  a  state  railroad  system.  There 
were  the  general  arguments  about  monopoly,  speculation, 
arbitrary  power,  with  which  we  are  all  familiar.  There 
were  special  arguments  which  applied  to  Italy  alone. 
There  were  strong  men  to  back  them ;  but  both  the  men 
and  the  arguments  on  the  other  side  were  stronger.  It  is 
a  noticeable  fact  that  the  majority  of  the  chambers  of 
commerce  were  opposed  to  government  management; 
especially  strong  was  this  opposition  from  the  Chamber 
of  Commerce  of  Milan,  probably  the  place  where  both 
systems  had  been  tried  most  fully. 

The  more  interesting  points  in  the  report  may  be 
summed  up  as  follows : 

i.  Most  of  the  pleas  for  state  management  are  based 
upon  the  idea  that  the  state  would  perform  many  services 
much  cheaper  than  they  are  performed  by  private  compa- 


1  A  French  translation  of  part  of  it  has  been  published. 


RAILROAD  LEGISLATION  IN  ITALY. 


229 


nies.  This  is  a  mistake.  The  tendency  is  decidedly  the 
other  way.  Private  companies  can  do  for  their  patrons 
many  things  which  the  state  cannot ;  but  it  is  doubtful 
whether  the  state  would  be  justified  in  doing  any  thing 
of  the  sort,  which  private  companies  cannot.  The  state  is 
much  more  likely  to  attempt  to  tax  industry  than  to  foster 
it.  And  when  it  attempts  to  tax  industry  it  is  more  om¬ 
nipotent  and  less  responsible  than  a  private  corporation. 

2.  State  management  is  more  costly  than  private  man¬ 
agement.  Such  at  least  was  the  conclusion  of  the  com¬ 
mission,  on  comparing  the  results  of  the  two  systems. 
The  differences  which  they  bring  out  are  quite  marked, 
though  it  is  fairly  open  to  question  just  how  much  they 
prove.  Comparing  state  and  private  railroads  in  different 

:  countries,  they  find  that  the  ratio  of  operating  expenses 
to  gross  earnings  is  always  greater  on  state  railroads — 
averaging  11  per  cent,  more  in  all  the  countries  compared. 
In  their  more  detailed  comparisons,  the  commission  take 
carefully  into  account  the  various  elements  which  involve 
cost  of  handling  ;  but  unfortunately  they  do  not  take  up 
the  question  whether  the  rates  charged  on  the  state  rail¬ 
roads  considered  may  not  be  lower  than  on  the  private 
railroads — a  thing  which  would  make  the  percentage  look 
unfavorable,  and  yet  be  rather  a  credit  to  the  manage- 
j  ment  than  otherwise.  We  cannot,  therefore,  accept  this 
•  point  without  reserve. 

3.  The  political  dangers  would  be  very  great.  Politics 
would  corrupt  the  railroad  management,  and  the  railroad 
management  would  corrupt  politics.  These  effects  have 
already  been  seen  in  actual  working.  Changes  of  rates 
are  made  for  the  sake  of  influencing  elections.  A  ques¬ 
tionable  experiment  was  recently  made  in  Belgium  in  the 
matter  of  railroad  tariffs ;  it  had  been  adopted  by  the 


230 


RAILROA  D  TRA  NSPOR  TA  T10N. 


government  as  a  means  of  currying  popular  favor  a  kind 
of  bribery  to  which  there  is  great  temptation.  It  would 
not  be  hard  to  find  similar  instances  in  other  countries 
on  both  sides  of  the  Atlantic.  . 

If  then  the  state  railroads  are  to  be  operated  by  private 
companies,1  we  come  back  to  the  question,  on  what  terms  ? 
Lease,  or  salaried  management  at  the  risk  of  the  state  ? 
As  between  the  two,  the  commission  preferred  the  idea 
of  lease,  but  it  did  not  commit  itself  to  either  ;  it  chose  a 
middle  ground,  devising  an  elaborate  scheme  of  participa¬ 
tion  of  earnings.  The  leading  ideas  of  this  scheme  are 
embodied  in  the  contracts  ultimately  approved  by  the 
Italian  Parliament. 

While  the  commission  was  studying  the  question,  mat¬ 
ters  were  coming  to  the  point  where  practical  solution  was 
growing  every  hour  more  necessary. 

1.  Where  the  companies  were  still  managing,  the  rolling 
stock  began  to  give  out.  The  companies  whose  roads  had 
been  purchased  by  the  state  were  still  in  part  operating 
them  provisionally  from  year  to  year  ;  but  they  never 
knew  what  turn  Italian  railroad  policy  might  take,  so  that 
no  one  was  ready  to  spend  any  money  now  for  the  sake 
of  the  future  interests  of  the  roads.  The  rolling  stock  had 
not  kept  pace  with  the  growth  of  business ;  on  many 
lines  they  were  not  even  attending  to  renewals.  As  a  re¬ 
sult,  cars  and  engines  were  wearing  out  very  fast ;  they 
were  already  inadequate  to  the  public  service,  and  were 
growing  worse  each  year. 

2.  Where  the  state  tried  to  manage  its  own  roads,  it  was 
\  making  a  bad  failure.  This  was  specially  noticeable  in 

the  railroads  of  North  Italy.  For  two  or  three  years  after 

1  The  commission  would  have  been  glad  to  have  the  state  get  rid  of  its 
railroads  altogether  ;  but  this  was,  under  the  circumstances,  impossible. 


RAILROAD  LEGISLATION  IN  ITALY. 


23I 


the  purchase  by  the  state,  the  company  had  continued  pro¬ 
visionally  to  run  the  roads.  But  in  July,  1878,  just  the 
time  when  the  commission  was  appointed,  the  road  was 
taken  out  of  their  hands  altogether,  and  run  by  the  state 
directly.  The  ministry  were  going  to  show  people  how  to 
run  a  railroad,  and  prove  that  the  state  could  do  it  better 
than  anybody  else.  Unfortunately  the  event  proved  just 
the  opposite.  The  road  began  to  go  to  pieces.  Before 
the  change,  the  personnel  of  the  railroad  officials  had  been 
first-rate,  and  animated  by  a  vigorous  spirit  of  activity  ; 
after  the  change  their  character  went  down,  their  activity 
slackened.  With  the  same  resources  they  were  no  longer 
able  to  handle  the  same  business.  There  was  a  time 
when  the  freight  service  of  Lombardy  was  suspended  for 
every  thing  but  perishable  goods,  simply  because  the  road 
could  not'  manage  the  freight  that  was  offered. 

3.  There  were  important  financial  reasons  for  a  change. 
The  public  treasury  was  in  trouble,  as  is  apt  to  be  the  case 
in  Italy.  In  the  hard-won  resumption  of  specie  payments, 
it  had  exhausted  all  its  power.  There  were  no  reserve 
resources.  Every  thing  was  taxed  as  high  as  it  would 
bear  ;  most  things  rather  higher.  The  government  bonds 
were  so  depreciated  that  it  could  not  borrow  money 
except  at  a  great  disadvantage.  We  have  seen  how  many 
years  it  took  them  to  find  the  means  of  carrying  out  their 
contract  to  purchase  the  Roman  railroad.  The  Southern 
railroad  was  still  unpaid  for.  Some  3,000  miles  of  new 
railroad  construction,  in  addition  to  the  5,000  miles  already 
existing,  had  been  voted  in  1879;  but  the  work  was  lan¬ 
guishing  for  lack  of  funds.  It  was  found  almost  impossible 
to  make  the  necessary  additions  to  the  rolling  stock  of 
the  existing  railroads.  Such  were  the  financial  elements 
of  the  problem — apparently  rather  a  hopeless  one;  the 


232 


RAILROAD  TRANSPORTATION. 


state  could  get  no  money,  the  railroads  were  not  par¬ 
ticularly  profitable :  required,  an  arrangement  by  which 
the  state  should  get  the  money  it  needed  for  improve¬ 
ments  and  extensions,  and  at  the  same  time  make  arrange¬ 
ments  for  the  running  of  the  railroads  which  should  be 
satisfactory  to  both  parties. 

The  Minister  of  Public  Works  tried  to  gain  time  by 
delay,  but  only  made  matters  worse.  The  Southern  rail¬ 
road  declared  that  it  could  not  allow  the  state  to  defer 
payment  any  longer,  and  that  the  state  had  forfeited  its 
right  to  buy  the  road  on  the  terms  agreed.  The  result 
has  been  that  in  order  to  control  the  road  without  owning 
it,  the  state  will  have  to  pay  the  stockholders  a  larger 
sum  annually  than  the  interest  on  the  purchase  money  at 
the  agreed  price. 

While  matters  were  in  this  state,  about  a  year  ago,  the 
office  of  Minister  of  Public  Works  was  offered  to  the  man 
who  had  been  Secretary  of  the  Commission  of  1878.  He 
went  to  work  vigorously  ;  conferred  again  and  again  with 
railroad  men  and  financiers,  and,  as  a  result,  came  forward 
in  the  spring  of  1884,  with  a  bill  which,  after  a  year’s  dis¬ 
cussion,  passed  the  Italian  Parliament  unaltered  in  its 
general  features.  By  contracts  which  went  into  effect 
July  1,  1885,  the  following  principles  were  established: 

1.  The  roads  are  to  be  operated,  presumably  1  for  sixty 
years,  by  two  companies,  nearly  equal  in  strength,  each 
controlling  a  trunk-line  system  running  northwest  and 
southeast.2  They  are  to  buy  at  a  valuation  (at  a  minimum 
of  about  $50,000,000)  the  rolling  stock  now  owned  by  the 
state.  They  will  keep  it  in  repair  at  their  own  charge  as 

1  The  contract  may  be  terminated  by  either  party  at  the  expiration  of 
twenty  or  forty  years. 

2  A  third  company  operates  the  railroads  of  Sicily,  under  a  contract  similar 
in  general  form  but  differing  slightly  in  details. 


RAILROAD  LEGISLA  TION  IN  ITAL  Y. 


233 


part  of  ordinary  operating  expenses,  but  will  be  entitled 
to  receive  interest  from  the  state  on  the  sum  paid  for  it. 
By  this  sale  the  state  will  have  a  sum  of  money  imme¬ 
diately  available  for  the  necessary  improvements  and 
extensions  it  has  so  long  wanted  to  make.  There  are 
provisions  by  which  the  operating  companies  are  to  aid 
in  this  construction,  borrowing  money  for  that  purpose. 

2.  The  companies  then  are  to  pay  for  ordinary  repairs 
of  rolling  stock  ;  but  what  about  repairs  of  line,  or  about 
extraordinary  expenditures  ?  It  is  hard  enough  for  any 
railroad  to  decide  what  should  be  charged  to  mainten¬ 
ance,  and  what  to  construction  account,  even  when  the 
two  must  ultimately  come  out  of  the  same  pocket  ;  but  if 
the  railroad  had  to  pay  the  maintenance  and  the  govern¬ 
ment  the  construction,  the  case  would  be  infinitely  worse. 
The  attempt  to  decide  what  should  be  charged  to  con¬ 
struction  account  would  give  rise  to  contest  and  litigation 
at  every  step.  Powerless  to  meet  the  difficulty  directly, 
the  Italians  try  to  evade  it ;  and  their  provisions  for  that 
purpose  form  the  most  interesting  feature  in  the  whole 
bill. 

All  the  system  of  division  is  based  upon  gross  and  not 
net  receipts.  From  the  gross  receipts  deductions  are  to 
be  made  in  every  instance  for  a  series  of  reserve  funds : 
(1)  $64  per  mile  for  extraordinary  repairs  ;  (2)  $48  per  mile 
single  track,  or  $80  per  mile  double  track,  for  renewal  of 
rails  ;  (3)  1  \  per  cent,  for  renewals  of  rolling  stock.  Actual 
increase  of  material  or  accommodations  is  to  be  provided 
for  in  a  manner  analogous  to  our  car  trusts  ;  and  the 
means  of  meeting  these  obligations  is  to  be  provided  by  a 
fourth  fund  “  for  property  increase,”  derived  from  the 
gross  receipts  in  a  more  complicated  manner. 

3.  It  is  estimated  that  the  annual  gross  receipts  will  be 


234  RAILROAD  TRANSPORTATION. 

at  least  $19,000,000  for  one  company  and  $22,000,000  for 
the  other.  In  that  case  6 per  cent,  will  go  to  the  com¬ 
panies  for  ordinary  expenses  and  for  profits,  per  cent, 
to  the  state  for  the  use  of  its  lines,  while  the  remaining  10 
per  cent,  will  more  than  cover  the -assessments  for  the 
three  first  funds  and  the  interest  paid  the  companies  on 
the  value  of  their  rolling  stock  ;  the  balance,  whatever  it 
is,  goes  to  the  fund  for  property  increase.  Any  excess  of 
gross  receipts  above  the  minimum  shall  be  divided  as 
follows:  Property  increase  fund,  15  per  cent.;  renewal  of 
rails  and  rolling  stock,  \  per  cent,  each  ;  state,  28  per 
cent. ;  company,  56  per  cent.  But  as  soon  as  the  gross 
return  of  either  company  shall  be  $10,000,000  above  the 
assumed  minimum,  the  company  shall  receive  but  50  per 
cent,  of  any  further  increase,  while  6  per  cent,  shall  be 
applied  to  such  reductions  of  rates  as  the  government 
may  indicate.  And  it  is  further  provided  that  if  either 
company  shall  find  itself  in  position  to  declare  a  dividend 
of  more  than  7^  per  cent.,  half  of  any  such  excess  shall  go 
to  the  government. 

At  this  distance  it  is  almost  impossible  to  pass  judg¬ 
ment  on  proposals  of  this  kind.  The  great  danger  in 
any  arrangement  by  which  the  operating  company  obtains 
a  determined  share  of  the  gross  receipts  is  that  the  com¬ 
pany  has  a  great  deal  more  interest  in  limiting  expendi¬ 
ture  than  in  developing  traffic.  It  gets  the  whole  benefit 
of  any  reduction  in  expenses  and  only  a  part  of  the  benefit 
j  of  any  increase  in  traffic.  It  is  therefore  under  constant 
temptation  to  do  two  things,  both  of  which  are  bad  for 
the  public  :  1,  to  prefer  a  small  traffic  at  high  rates  to  a 
large  traffic  at  low  rates  ;  2,  to  limit  as  much  as  possible 
the  expenditure  for  renewals  and  permanent  improve¬ 
ments  or  to  shift  the  burden  of  all  such  improvements  on 


RAILROAD  LEGISLATION  IN  ITALY .  235 

the  owner.  The  first  of  these  dangers  is  not  provided 
against  by  the  proposed  law.  Perhaps  it  is  thought  that 
the  Italian  Government  exercises  sufficient  power  over  the 
tariffs  to  prevent  any  such  danger.  This  seems  like  a 
mistake.  It  can  prevent  any  increase  in  rates,  but  cannot 
ordinarily  enforce  any  diminution.  But  in  a  growing  and 
active  railroad  system,  the  charges  ought  naturally  to 
diminish.  With  regard  to  the  second  point,  the  safeguards 
are  carefully  planned.  The  only  possible  questions  are 
whether  the  income  of  the  companies  will  keep  the  prop¬ 
erty-increase  fund  at  a  proper  level,  and  whether  the 
assessments  have  been  placed  at  the  right  figures.  If  any 
mistakes  have  been  made  here,  it  certainly  is  not  for  want 
of  care  or  study,  and  we  shall  look  with  interest  to  see 
how  far  the  event  justifies  the  expectation  of  the  framers 
of  the  bill.  For  if  it  should  be  possible  to  evade  the  most 
difficult  questions  of  construction  account  by  a  closely 
calculated  system  of  reserve  fund,  the  example  of  Italy 
ijwould  probably  be  followed  elsewhere.  But  in  a  matter 
which  is  liable  to  so  many  disturbing  causes  as  the  con¬ 
struction  account,  any  very  brilliant  success  seems  too 
much  to  hope  for. 


CHAPTER  XIII. 


RESULTS  OF  STATE  RAILROAD  MANAGEMENT. 

Extension  of  government  activity — Motives  which  have  led  to  it — Principles 
upon  which  government  enterprises  may  be  managed — Tolls  vs.  Profits 
— German  attempts  to  base  rates  upon  cost  of  service — Failure  to  carry 
out  the  principle  completely — Local  discriminations — The  sliding  scale 
— International  conflicts — Pools — Rates  based  on  cost  of  service  are 
almost  necessarily  high — General  arguments  for  and  against  government 
management — The  telegraph  question  in  the  United  States  to-day — The 
railroad  question  in  the  future. 

Adolph  Wagner  :  “  Finanzwissenschaft.”  Fiinfter  Hauptabschnitt :  Com¬ 
munications-  und  Transportwesen,  etc.  3d  ed.,  Leipzig,  1883,  pp.  640-792 
(2d  ed.,  pp.  525-675,  also  published  separately). 

Emil  Sax  :  “  Die  Eisenbahnen,”  Vienna,  1879,  pp.  139-264  ;  404-464. 

W.  S.  Jevons  :  “  The  Railways  and  the  State.”  (“  Essays  and  Addresses,” 
1874  ;  “  Methods  of  Social  Reform,”  London,  1883.) 

There  can  be  no  question  that  the  sphere  of  government 
activity  has  in  the  last  fifty  years  been  rapidly  widening. 
The  postal  service  has  increased  twenty-fold,  and  has 
absorbed  no  small  part  of  the  express  business.  Outside 
of  the  United  States,  governments  have  generally  taken 
charge  of  the  telegraph.  The  tendency  toward  govern¬ 
ment  railroad  management  has  been  less  universal,  but 
scarcely  less  noticeable.  Twenty  years  ago,  government 
ownership  of  railroads  was  the  exception,  even  in  Central 
Europe.  To-day,  it  is  far  different.  The  movement  which 
carried  Prussia  and  Belgium  into  a  virtually  complete 
system  of  state  ownership,  was  not  without  its  effects 
elsewhere.  We  have  seen  how  it  was  to  a  certain  extent 

236 


RESULTS  OF  STATE  MANAGEMENT. 


23  7 


felt  in  France,  in  Austria,  and  in  Italy.  It  was  a  necessary 
part  of  the  general  movement  in  European  history  by 
which  national  life  and  national  unity  were  intensified  ;  a 
movement  which  showed  itself  on  an  entirely  different 
side,  in  the  almost  universal  attempt  to  extend  the  pro¬ 
tective  tariff  system.  Both  these  movements,  and  others 
like  them,  were  the  outgrowth  of  the  spirit  which  had  de¬ 
veloped  in  the  great  national  wars  between  Italy  and 
Austria,  Germany  and  France,  Russia  and  Turkey.  Eng¬ 
land  alone  among  the  great  powers  remained  unmoved 
either  to  war,  to  protection,  or  to  state  railroads. 

It  is  not  generally  known  how  nearly  alone  England 
and  the  United  States  stand  in  depending  upon  private 
enterprise  for  their  railroads.  Other  countries  have  either 
gone  to  the  extreme  of  state  ownership,  or  have  at  any 
rate  adopted  a  well-marked  system  of  state  support  and 
control.  The  smaller  or  less  populous  states  have,  as  a 
rule,  adopted  the  former  policy,  the  large  states  the  latter. 
This  is  not  merely  true  of  Europe  (where  Switzerland 
forms  the  only  well-defined  exception),  but  of  the  world 
as  a  whole.  In  general,  the  South  American  states  own 
their  railroads  ;  Brazil  owns  but  a  small  part  of  hers,  sub¬ 
sidizing  most  of  the  remainder.  State  ownership  is  uni¬ 
versal  in  Australia  ;  in  India  and  in  British  America,  it  is 
the  exception  ;  but  state  subsidy  is  the  rule  in  India,  and  is 
not  infrequent  in  Canada.  In  Europe,  besides  the  states 
whose  history  has  been  given  in  detail,  state  ownership  is 
exemplified  in  Denmark,  Sweden,  Norway,  and,  to  a  con¬ 
siderable  extent,  in  Holland — not  to  speak  of  the  smaller 
states  of  Germany.  The  policy  of  support  and  control  is 
seen  in  Spain  and  Portugal,  and,  above  all,  in  Russia  ;  for 
in  Russia  the  state  has  furnished  a  large  part  of  the  capital 
actually  invested,  and  yet  has  very  little  actual  ownership 
to  show  for  it. 


238 


RA ILROAD  TRA NSPOR  TA  TION. 


The  motives  which  have  led  governments  to  extend  the 
sphere  of  their  business  activity,  have  been  three : 

1.  To  increase  their  own  political  influence. 

2.  To  make  up  for  the  lack  of  private  enterprise. 

3.  To  avoid  the  abuses  incident  to  private  management. 

The  last  consideration,  which  is  the  main  point  in  the 

United  States  to-day,  has  played  but  a  subordinate  part 
elsewhere. 

The  desire  to  extend' political  influence — military,  civil, 
or  financial — has  usually  been  the  chief  motive.  Military 
power  has  been  the  leading  aim  of  most  government 
transportation  systems,  from  the  Appian  Way  of  Rome  to 
the  Trans-Caspian  Railroad  which  Russia  is  building  out 
into  the  deserts  of  Central  Asia.  It  is  the  desire  for  cen¬ 
tralized  power  that  underlies  Bismarck’s  railroad  schemes. 
It  was  with  this  aim  that  Louis  XI.,  of  France,  estab¬ 
lished  the  first  national  post-office  four  hundred  years  ago  ; 
it  was  as  a  means  of  taxation  that  his  successors  and  their 
imitators  in  other  countries  chiefly  used  it  for  more  than 
three  centuries  after  him. 

The  wish  to  make  up  for  the  lack  of  private  enterprise 
has  often  been  the  motive  which  induced  government  to 
take  up  an  industry  in  its  early  stages.  This  was  the  case 
with  canals ;  it  was  the  case  with  telegraphs.  It  was, 
perhaps,  still  more  noticeably  the  case  with  railroads 
which  were  felt  to  be  necessary  to  national  development. 
Sometimes  recourse  was  had  to  subsidies  or  guarantees  of 
interest ;  sometimes  the  state  undertook  to  construct  rail¬ 
roads  on  its  own  account.  Every  civilized  country,  with 
the  possible  exception  of  England,1  has  felt  this  necessity, 
and  has  had  recourse  either  to  subsidies  or  to  state  owner¬ 
ship.  Even  in  the  United  States  we  have  had  our  periods 


1  England  has  given  subsidies  to  Irish  lines. 


RESULTS  OF  STATE  MANAGEMENT \ 


239 


of  reckless  land-grants  and  equally  reckless  municipal 
subscriptions,  not  to  speak  of  the  experiments  made  at 
the  very  outset  by  the  individual  States  in  railroad  man¬ 
agement,  and  by  the  National  Government  in  telegraphy. 

To-day  we  do  not  feel  the  force  of  these  motives. 
Private  enterprise  in  investing  capital  is  too  great,  rather 
than  too  small.  The  political  influence  of  our  administra¬ 
tion  needs  to  be  checked  rather  than  extended.  What 
we  do  feel  is  the  set  of  abuses  involved  in  the  present 
system  of  private  management ;  and  those  who  desire 
government  management  of  telegraphs  or  railroads,  do  so 
in  the  hope  that  it  would  be  a  means  to  check  those  abuses. 

There  is  no  inherent  reason  why  the  rates  of  govern¬ 
ment  railroads  should  be  differently  arranged  from  those  of 
private  railroads.  It  is  not  only  perfectly  conceivable  that 
the  two  should  be  managed  upon  the  same  principles,  but 
in  a  great  many  instances  it  actually  happens.  Where  a 
“  mixed  system”  of  competing  state  and  private  lines 
really  flourishes,  this  is  almost  always  the  case.  The 
state  railroads  of  Belgium  and  Germany  fifteen  or  twenty 
years  ago  were  simply  ordinary  roads  whose  revenue 
accrued  to  the  state.  As  far  as  their  relations  to  the 
shippers  were  concerned,  they  were  run  to  make  money; 
not  with  a  view  to  any  general  considerations  of  public 
policy.  This  was  inevitable.  The  tax-payers  will  not 
allow  a  government  to  lose  money  or  make  small  profits 
on  its  lines  when  a  competing  private  road  is  making 
larger  profits.  If  the  latter  is  run  to  make  as  much 
money  as  possible,  the  former  must  also  necessarily  follow 
its  example,  and — perhaps  in  a  somewhat  disguised  form 
— charge  what  traffic  will  bear.  This  constitutes  at  once 
the  advantage  and  the  disadvantage  of  the  mixed  system. 
It  insures  that  the  state  roads  will  be  managed  on  busi- 


240 


RAILROAD  TRANSPORTATION. 


ness  principles.  But  it  does  not  leave  the  government 
free  to  manage  them  with  a  view  to  broader  principles  of 
public  policy,  right  or  wrong.  This  was  probably  the 
great  reason  why  the  governments  of  Belgium  and 
Prussia  found  the  competition  of  private  roads  intoler¬ 
able.  It  did  not  interfere  with  their  profits;  it  did  in¬ 
terfere  with  the  freedom  of  government  action. 

When  the  state  has  its  hands  free,  it  has  its  choice  of 
several  aims,  instead  of  being  restricted  to  the  mere 
attempt  to  make  good  business  profits.  A  government 
enterprise  may  be  managed  on  any  one  of  four  principles : 
I.  As  a  tax.  2.  For  business  profits.  3.  To  pay  ex¬ 
penses.  4.  For  public  service,  without  much  regard  to 
the  question  of  expense. 

Under  the  first  principle,  a  government  enterprise 
charges  more  than  would  be  charged  by  private  business. 
We  have  few  examples  of  the  sort  in  America.  In 
Europe  they  are  common  enough,  in  the  form  of  govern¬ 
ment  monopolies  of  tobacco,  salt,  etc. ;  taken  up,  not  on 
account  of  any  business  needs,  but  as  a  convenient  means 
of  taxing  the  people  heavily. 

Under  the  second  principle,  a  government  undertaking 
is  managed  on  the  same  system  as  any  private  enterprise 
— to  make  all  the  money  it  can.  As  already  indicated, 
this  is  regularly  the  case  in  those  branches  of  industry 
where  government  comes  into  competition  with  private 
concerns ;  for  instance,  in  the  mixed  system  of  railroads, 
or  in  the  parcels  post  as  a  competitor  with  the  express 
companies.  If  there  is  no  such  competition,  but  a  gov¬ 
ernment  monopoly,  this  second  principle  cannot,  in  the 
nature  of  things,  be  applied.  When  a  government  mo¬ 
nopoly  undertakes  to  make  all  the  money  it  can,  what  it 
gets  is  not  business  profit  but  a  tax. 


RESULTS  OF  STATE  MANAGEMENT. 


241 


The  third  principle  is  the  system  of  tolls,  or  rates  based 
upon  cost  of  service.  On  the  whole,  it  is  the  general  prin¬ 
ciple  upon  which  the  industrial  enterprises  of  government 
are  run.  The  aim  may  be  to  cover  expenses  either  with 
or  without  counting  interest.  The  interest  account  is  not 
usually  included  in  considering  the  cost  of  the  post  office; 
the  item  is  so  small  that  it  is  possible  to  neglect  it.  In 
most  European  postal  services,  and  especially  in  that  of 
England,  they  aim  to  do  something  more  than  cover 
operating  expenses.  In  the  United  States  they  regularly 
do  somewhat  less.  In  enterprises  involving  a  larger  capi¬ 
tal  expenditure,  they  aim  to  cover  interest  also.  This  is 
the  case  in  government  telegraph  and  railroad  service,  in 
light-house  and  hospital  taxes  on  shipping,  and  in  a  variety 
of  other  cases. 

The  great  mass  of  government  activity  is  not  industrial, 
and  does  not  seek  to  pay  expenses.  It  is  organized  for 
public  service  without  regard  to  strictly  business  con¬ 
siderations.  Under  this  head  come  the  administration  of 
justice,  and  police  service,  with  the  activity  of  the  govern¬ 
ment  in  matters  of  education  and  health.  They  cannot 
pay  for  themselves,  and  have  to  be  paid  for  by  taxation. 

It  is  obvious  that  neither  the  first  nor  the  last  of  these 
principles  is  a  fit  guide  for  state  railroad  management. 
We  cannot  make  them  either  a  means  of  taxation  or  a 
means  of  gratuitous  service.  The  former  would  constitute 
a  tax  on  commerce  as  such — a  thing  to  be  avoided.  The 
latter  would  constitute  a  tax  on  the  community  for  the 
sake  of  commerce — a  thing  also  to  be  avoided  if  possible.1 

1  The  latter  alternative  is  not  always  avoided.  A  subsidy  in  almost  any 
possible  form  is  a  tax  on  the  general  community  for  the  sake  of  commerce 
which  could  otherwise  not  exist.  If  repaid  at  all,  it  is  repaid  indirectly. 
Another  instance  of  the  same  kind  occurs  frequently  in  the  United  States 
postal  service.  There  are  a  great  many  mail  routes  which  are  necessarily 


242 


RAILROAD  TRANSPORTATION . 


The  choice  then  lies  between  the  second  and  third  of 
these  principles.  It  is  a  question  of  profits  vs.  tolls.  And 
the  two  different  answers  to  this  question  mark  two  differ¬ 
ent  phases  of  the  state  railroad  system.  The  first  answer 
— management  for  profit — was  the  earlier  one.  It  was 
given,  in  general,  whenever  there  was  competition  on 
tolerably  equal  terms  between  state  and  private  roads.  It 
prevailed  in  Belgium  till  1870,  in  Prussia  till  1875  ;  in 
Austria  it  still  prevails  to  a  great  extent.  When  roads  are 
managed  on  this  principle,  we  usually  have  the  same  sys¬ 
tem  of  rates  which  we  find  on  private  roads  ;  a  system  of 
classification,  differential  rates,  and  special  contracts.  In 
other  words,  there  is  no  serious  pretence  of  basing  differ¬ 
ences  in  charge  upon  differences  in  cost  of  service. 

Under  the  system  of  tolls,  on  the  other  hand,  this  is 
made  the  fundamental  principle.  The  very  first  schedules 
of  rates  in  some  countries — Belgium,  for  instance — were 
constructed  with  this  idea  in  view.  But  these  early  efforts 
were  extremely  crude,  and  were  abandoned  about  1850. 
It  was  not  until  1867  that  there  were  signs  of  a  return  to 
this  idea.  In  that  year  the  railroads  of  the  Duchy  of 
Nassau  adopted  a  tariff  avowedly  based  on  cost  of  service. 
Four  years  later  the  same  attempt  was  carried  out  upon  a 
much  larger  scale  in  Alsace-Lorraine,  and  from  those 
provinces  it  spread  eastward  and  northward,  and  has  had 
a  very  considerable  influence  upon  the  system  of  charges 
throughout  Germany.* 1 

In  these  provinces  it  was  started  without  any  fixed  pur¬ 
pose.  During  the  war  of  1870,  when  Alsace  and  Lorraine 
were  occupied  by  the  German  armies,  the  railroads  of 

unprofitable.  To  maintain  them  involves  a  tax  upon  somebody — either  on 
the  letter-writers  on  more  frequented  routes,  or  on  the  general  funds  of  the 
community.  The  latter  alternative  is  the  one  usually  chosen. 

1  Schreiber  :  “  Tarifwesen  der  Eisenbahnen,”  Vienna,  1884,  pp.  121-171. 


RESULTS  OF  STATE  MANAGEMENT. 


243 


this  district  were  run  provisionally  by  German  mili¬ 
tary  authorities — the  French  officials  having,  of  course, 
disappeared.  Amid  the  variety  of  more  pressing  con¬ 
cerns,  the  Germans  made  no  attempt  to  apply  a  com¬ 
plicated  system  of  rates.  They  simply  established  one 
mileage  unit  of  charge  per  hundred  pounds  ;  another  per 
car-load  ;  and  a  third  per  platform  car-load.  It  was  a 
crude  pro-rata  system,  with  no  attempt  at  classification, 
except  as,  incidentally,  the  most  valuable  goods  would  be 
shipped  at  parcels  rates  and  the  less  valuable  ones  at  the 
car-load  rates. 

When  peace  returned  the  roads  remained  under  the 
direct  management  of  the  empire.  What  was  to  be  the 
system  of  charges?  The  business  of  the  country  had 
grown  up  under  French  classification,  and  would  be 
thrown  into  confusion  by  applying  that  of  Germany.  On 
the  other  hand,  the  German  officials  had  been  trained  in  the 
classification  of  Germany,  and  could  not  successfully 
apply  that  of  France.  There  was  a  conflict  between  the 
classification  suited  to  the  business  and  the  classification 
suited  to  the  officials.  They  compromised  by  applying 
no  classification  at  all — just  what  they  had  provisionally 
been  doing  in  war  time.  What  had  been  adopted  as 
a  makeshift  now  became  a  settled  principle.1 

This  is  the  so-called  “  natural  system.”  It  was  adopted 
in  Alsace-Lorraine  in  1871  ;  by  the  connecting  roads,  on 
through  business  to  or  from  these  provinces,  in  1872  ;  by 
Baden  in  1873;  by  Hungary  in  1874.  The  rate  on  any 
class  of  goods  consisted  of  a  fixed  charge  to  cover  ter¬ 
minal  expenses,  independent  of  distance,  plus  a  rate 
per  mile  to  cover  movement  expenses.  For  instance,  the 
tariff  of  Southwestern  Germany,  reduced  to  American 


1  Schreiber,  pp.  153,  154. 


244 


RAILROAD  TRANSPORTATION . 


units,  was  approximately  as  follows,  per  ton  of  each  class 


of  goods  : 


Express 
Parcels 
Box  car : 

Half  car-load  per  ton 
Whole  “ 

Platform  car : 

Half  car-load  per  ton 
Whole  “ 

Coal  •  •  •  * 


Terminal. 

Mileage  rates. 

cents. 

cents. 

55 

9.00 

44 

3.60 

33 

2.70 

.  22 

2.25 

33 

1.80 

.  22 

1-35 

33 

0.90 

This  system  in  its  complete  form  did  not  extend  itself 
widely.  But  it  had  a  decided  influence  on  the  rates  and 
schedules  in  other  parts  of  Germany.  In  1874  Bavaria 
adopted  a  “  compromise  tariff.”  In  the  years  1875-76 
the  same  change  was  urged  in  Prussia ;  and  in  the  year 
1877  the  so-called  “reform  tariff  ”  of  the  German  Empire 
came  into  being.  It  differs  from  the  natural  system 
chiefly  in  the  existence  of  a  slight  amount  of  classifica¬ 
tion,  which,  in  practice,  amounts  to  a  good  deal.  The 
classification  and  mileage  rates  (exclusive  of  terminals) 
are  as  follows : 


Class. 

Cents. 

Express  ........ 

9.0 

Parcels  ........ 

4-5 

A 1  (general  rate  for  half  car-loads)  . 

3-0 

B  (general  rate  for  whole  car-loads)  . 

2-5 

A2  (grain,  lumber,  coal,  etc.,  half  car-loads) 
Special  I.  (grain,  etc.,  car-loads) 

2.0 

1.8 

Special  II.  (lumber,  etc.,  car-loads)  . 

1.4 

Special  III.  (coal,  etc.,  car-loads) 

1.04-0.88 

Austria  adopted  a  similar  system,  but  did  not  go  quite 
so  far  toward  the  cost-of-service  principle.  The  chief 
difference  was  that  the  German  system  had  equal  mileage 
rates  (except  for  the  terminal),  while  the  Austrian  system 
was  constructed  on  a  sliding  scale,  the  mileage  rates  for 


RESULTS  OF  STATE  MANAGEMENT. 


245 


long  distances  being  less  than  for  short  ones.  It  should 
be  understood  that  both  in  Germany  and  Austria  there 
are  special  rates  which  deviate  from  the  general  schedule. 
In  Germany  they  are  rather  infrequent,  in  Austria  quite 
common. 

Such  is  the  system  of  rates  which  is  on  the  whole  most 
characteristic  of  state  railroad  management.  It  was 
adopted  on  two  quite  distinct  grounds,  one  theoretical, 
the  other  practical.  As  a  matter  of  theory  it  was  thought 
that  rates  ought  to  be  based  on  differences  in  cost  of  ser¬ 
vice  1 — or  rather,  to  put  it  more  accurately,  that  differ¬ 
ences  in  rates  ought  to  be  based  upon  differences  in  cost 
of  service.  As  a  matter  of  practice,  it  was  thought  that 
it  would  result  in  good  both  to  the  railroads  and  the  pub¬ 
lic.  We  thus  have  to  consider  two  distinct  questions  at 
the  same  time  :  first,  how  far  the  theory  was  actually 
carried  out ;  and,  second,  whether  the  results  were  good  or 
bad. 

First,  then,  were  differences  in  rates  actually  based 
upon  differences  in  cost  of  service  ? 

As  regards  classification — differences  in  charge  on 

% 

different  kinds  of  freight — the  theory  was  never  com- 

1  The  theory  is  by  no  means  universally  accepted,  even  by  those  who 
favor  state  management.  Gustav  Cohn  (Engl.  Eisenbahnpolitik,  iii. ,  65-84) 
takes  the  position  that  rates  can  not  properly  be  based  upon  cost  of  service  ; 
and  that,  therefore ,  the  state  should  own  the  railroads,  because  private 
agencies  can  not  be  trusted  to  apply  the  inevitable  principle  of  charging 
what  the  traffic  will  bear. 

Cohn’s  reasoning  is  abstruse,  but  extremely  able.  As  long  as  we  stand  on 
purely  economic  ground,  it  confirms  the  conclusions  reached  in  chap.  vi.  We 
are  at  issue  only  when  it  comes  to  the  question,  Can  the  state  be  trusted  to 
do  better  than  private  agencies  ?  A  German  naturally  answers,  Yes.  An 
American  naturally  answers,  No. 

A  few  of  the  best  thinkers  agree  more  or  less  fully  with  Cohn.  The  argu¬ 
ment  of  the  text  is  directed  against  the  cruder  view  which  generally  prevails. 


246  RAILROAD  TRANSPORTATION . 

pletely  carried  out.  Even  in  Alsace  itself,  an  exception 
had  to  be  made  in  the  matter  of  coal— an  exception  which, 
by  special  provision,  was  sometimes  extended  to  other 
cheap  and  necessary  articles.  A  system  of  rates  by  which 
each  article  pays  its  share  of  the  fixed  charges  would 
virtually  prohibit  the  movement  of  coal.  Yet  the  moment 
you  abandon  this  principle  you  abandon  the  system  of 
basing  rates  upon  cost  of  service. 

As  regards  local  discriminations,  they  carried  the  prin¬ 
ciple  out  systematically.  Yet  even  in  Germany,  where 
the  results  were  most  complete,  they  overdid  the  matter 
in  such  a  way  as  to  prevent  the  theory  from  being  strictly 
followed.  The  theory  is  this :  Each  consignment  ought 
to  pay  a  fixed  charge,  independent  of  distance,  to  cover 
terminal  expenses,//^  a  rate  per  mile  to  pay  for  move¬ 
ment  expenses.  But  if  they  carried  this  theory  out,  it 
would  injure  both  the  very-short-distance  traffic  and  the 
very-long-distance  traffic.  For  the  long-distance  traffic 
the  mileage  rate  heaps  up  so  high  as  to  prevent  the  sale 
of  goods  in  distant  markets.  For  the  short-distance  traffic 
the  terminal  charge  amounts  to  so  much  as  to  make  men 
and  goods  either  go  by  horse-power  or  not  go  at  all.  It 
prevents  the  development  of  a  vast  and  in  some  respects 
easily  handled  traffic. 

The  authorities  felt  the  force  of  these  last  points,  and 
in  order  not  to  check  local  business,  they  made  their  ter¬ 
minal  charges  very  low — lower  than  the  theory  demanded. 
But,  according  to  the  principle  of  tolls,  if  they  made  one 
element  of  the  charge  too  low,  they  had  to  make  up  else¬ 
where.1  This  led  to  a  still  further  increase  of  the  mileage 

1  This  constitutes  a  distinction  between  rates  based  upon  cost  of  service 
and  rates  based  upon  what  the  traffic  will  bear.  In  the  latter  case,  they 
cannot  and  do  not  try  to  make  up  for  any  such  losses  (see  pages  122,  123). 
For  the  evil  effects  of  thus  trying  to  make  up  deficits,  see  page  250. 


RESULTS  OF  STATE  MAN  A  GEM  EN  T.  247 

rates,  and  matters  all  the  worse  for  the  long-distance 
traffic. 

Belgium  and  Austria  felt  this  difficulty,  and  adopted 
the  sliding  scale  of  charges.  This  was  probably  good 
policy,  but  it  was  an  abandonment  of  the  principle  on 
which  they  pretended  to  act.  It  made  the  middle-distance 
traffic  pay  relatively  more  profit  than  the  long-  or  short- 
distance.  In  other  words  they  based  rates  on  what  the 
traffic  would  bear,  and  then  adopted  an  elaborate  system  of 
pulling  wool  over  their  own  eyes,  in  order  that  the  schedules 
might  look  as  though  they  were  based  upon  cost  of  service. 

Prussia  did  not  adopt  the  sliding  scale  as  a  principle.1 
But  down  to  the  year  1880  she  did  virtually  the  same 
thing  in  another  way.  The  long-distance  traffic 
was  favored  by  an  elaborate  system  of  special  rates  for 
export,  import,  or  transit  trade.  They  were  not,  in  gen¬ 
eral,  contracts  with  individual  shippers  ;  but  each  line  of 
goods  had  a  special  tariff  of  its  own,  applied  equally  to  all 
who  engaged  in  international  business.  A  decided  change 
was  made  in  1879-80.  Bismarck  at  ..that  time  took  up  a 
more  distinctly  protective  tariff  policy.  To  allow  these 
favors  to  foreign  trade  was  virtually  to  counteract  all  such 
attempts  at  protection ;  for  in  many  cases  the  increased 
import  duties  were  followed  by  a  lowering  of  railroad 
charges  which  counterbalanced  it.  To  prevent  this,  the 
policy  of  special  rates  for  international  trade  was  abandoned. 

Austria  was  the  nation  which  suffered  most  directly 
from  this  change,  because  so  much  of  her  export  trade 
went  into  Prussia,  or  through  Prussia  to  other  countries. 
This  trade  could  not  bear  the  increase  of  rates.  Some  of 
the  traffic,  instead  of  going  northward  via  Prussia,  went 
southward  via  Trieste  and  the  Mediterranean.  But  there 


1  Except  on  special  class  III.  (coal). 


248 


RA ILR OA D  TRA NSPOR  TA  TION. 


was  a  more  direct  way  of  evading  the  trouble.  The  river 
Elbe  runs  from  the  Austrian  frontier  right  through  the 
heart  of  Prussia  to  Hamburg.  By  putting  steamers  on 
the  Elbe,  Austria  obtained  a  through  rail-and-water  route 
independent  of  Prussian  rail  connections.  By  making 
use  of  the  Bavarian  railroads  (which  were  not  under  the 
control  of  Prussia)  Austria  \vas  also  enabled  to  carry 
her  products  to  the  Rhine,  and  thus  ship  them  to  Holland, 
Belgium,  or  England.  The  Prussian  roads  felt  the  loss  of 
their  through  traffic.  The  government  withdrew  from  its 
extreme  position,  and  attempted  a  partial  compromise 
with  Austria.  This  was  rejected.  They  then  tried  retalia¬ 
tion.  They  made  connections  with  Danube  steamers  to 
prevent  the  Austrian  roads  from  getting  Prussian  traffic. 
And  thus  we  had  the  curious  spectacle  of  a  fight  of  Aus¬ 
trian  railroads  and  Prussian  waterways  on  the  one  hand, 
against  Prussian  railroads  and  Austrian  waterways  on  the 
other.  Each  party  succeeded  in  causing  the  other  a  good 
deal  of  inconvenience  ;  but  neither  party  was  able  to  make 
foreign  traffic  pay  domestic  rates.  The  question  has  but 
just  come  to  a  settlement. 

It  is  clear  that  even  with  the  whole  power  of  the  Euro¬ 
pean  governments,  the  laws  of  trade  have  proved  too 
strong  for  any  arbitrary  attempt  at  railroad  regulation  to 
succeed.  The  effort  to  base  rates  upon  cost  of  service  has 
only  resulted  in  a  compromise.  It  must  be  confessed,  on 
the  other  hand,  that  important  results  have  been  achieved. 
They  have  done  away  with  the  most  dangerous  forms  of 
special  contract  and  secret  discrimination.  The  worst 
abuses  under  which  we  suffer  in  America  have  been 
avoided  ;  at  the  sacrifice,  however,  of  many  advantages 
which  we  enjoy.1 


1  In  the  way  of  rapid  development  and  low  through  rates. 


RESULTS  OF  STATE  MANAGEMENT.  249 

The  real  principle  on  which  the  Prussian  system  of 
railroad  charges  is  based  was  clearly  stated  by  the  govern¬ 
ment  in  1879.1  I*  The  tariff  should  be  clear.  2.  It 
should  be  equable.  3.  It  should  not  produce  bad  indi¬ 
rect  effects.  4.  It  should  not  give  opportunities  for 
official  corruption  and  corrupt  favors.  This  is  not  basing 
rates  upon  cost  of  service  (unless  by  a  somewhat  strained 
interpretation  of  the  second  heading).  It  bases  them 
upon  intelligible  practical  grounds,  of  which  any  railroad 
man  will  see  the  force,  even  though  he  may  not  deem  it 
possible  to  apply  them  to  the  tariff  of  his  own  road. 

This  effect  upon  rates  can  only  be  secured  at  the  sacri¬ 
fice  of  every  thing  like  railroad  competition,  and  of  any 
good  which  railroad  competition  may  bring  in  the  way  of 
rapid  development  or  of  efficient  use. 

The  governments  of  Central  Europe  have  given  up 
trying  to  procure  obedience  to  these  principles  by  simple 
prohibitory  laws,  such  as  are  occasionally  proposed  in 
Congress.  They  have  a  hundred  times  more  police  power 
than  we  have,  but  they  do  not  undertake  to  do  this.  To 
secure  obedience  to  this  system,  they  must  take  away  the 
temptation  to  violate  it.  This  can  only  be  done  by  a 
system  of  pooling  contracts.  These  are  accordingly  legal¬ 
ized  and  enforced.  They  are  carried  on  to  an  extent 
undreamed  of  in  America.2  They  have  both  traffic  pools 
and  money  pools.  There  are  pools  between  state  roads 
and  private  roads,  between  railroads  and  water  routes.  It 
is  regarded  as  a  perfectly  legal  thing  that  one  road  should 
pay  another  a  stated  sum  of  money  in  consideration  of 
the  fact  that  the  latter  abstains  from  competing  for  the 
through  traffic  of  the  former. 


1  Schreiber,  p.  144. 

3  Sax,  pp.  84-96.  Schreiber,  pp.  235-242. 


2  5° 


RAILROAD  TRANSPORTATION . 


These  principles,  applied  by  these  means,  tend  to  keep 
rates  up.  The  roads  do  not  lower  the  local  rates  to  any 
extent,  but  rather  raise  the  through  ones.  They  level  up 
instead  of  levelling  down.  They  are  not  occupied  with 
the  question  how  to  lower  rates,  but  how  to  keep  the  right 
proportion  between  existing  rates.  In  trying  to  decide 
that  matter  fairly,  they  are  tempted  to  put  every  thing  high 
enough  to  leave  themselves  elbow-room.  In  their  anxiety 
to  decide  what  is  a  fair  rate  in  proportion  to  other  rates,  un¬ 
der  existing  circumstances,  they  neglect  the  question,  How 
can  we  change  circumstances  so  as  to  make  lower  rates  ? 1 

This  is  an  evil  inherent  in  the  very  nature  of  tolls. 
There  was  never  a  more  mistaken  idea  than  the  idea  that 
rates  would  be  reduced  if  they  were  based  upon  cost  of 
service.  The  principle  keeps  rates  up.  If  it  is  strictly 
applied,  it  makes  it  necessary  that  each  item  of  business 
should  pay  its  share  of  the  fixed  charges.  A  great  deal  of 
business  which  would  pay  much  less  than  its  share  of  the 
fixed  charges  (though  still  giving  a  slight  profit  above 
train  and  station  expenses)  is  thus  lost.  This  is  bad  for 
the  railroads,  bad  for  the  shipper,  and  bad  for  the  prospect 
of  low  average  rates.  It  makes  the  business  of  the  roads 
so  much  smaller  that  the  share  of  fixed  charges  which 
each  piece  of  business  has  to  pay  (under  this  system)  be¬ 
comes  higher,  while  the  profit  does  not  increase,  and  the 
inducement  to  new  construction  is  lessened.  These  things 
are  not  mere  theory,  but  are  matters  of  history.  The 
great  reductions  of  rates,  whether  in  the  United  States, 
Belgium,  or  elsewhere,  have  taken  place  under  the  stim¬ 
ulus  of  competition,  even  if  it  was  only  temporary.  They 
have  been  made  at  the  very  periods  when  the  principle  of 
basing  rates  upon  cost  of  service  was  most  systematically  # 
violated.  It  is  the  countries  which  have  passed  through 


] Railroad,  Gazette ,  1885,  p.  119* 


RESULTS  OF  STATE  MANAGEMENT. 


251 


such  periods  that  enjoy  the  lowest  rates.  The  average 
rates  on  all  shipments  in  Ohio  to-day  are  probably  lower 
than  the  German  rates  for  coal  for  the  same  average 
distance.  And,  finally,  the  refusal  to  allow  railroads  to  be 
run  for  profits  prevents  the  construction  of  new  roads 
when  they  are  really  needed.  If  a  road  with  its  hands 
free  could  just  make  a  profit,  a  road  forced  to  base  rates 
upon  cost  of  service,  and  thus  check  the  development  of 
certain  lines  of  trade,  could  not  do  so.  It  would  thus 
have  to  go  unbuilt,  or  else  receive  a  subsidy — a  dangerous 
policy.  The  effort  to  base  rates  on  cost  of  service  goes 
hand  in  hand  with  the  policy  of  subsidies.  The  money 
ultimately  comes,  or  is  supposed  to  come,  out  of  the 
pockets  of  local  tax-payers.  Nobody  else  is  enough 
interested  to  have  the  road  built.  If  they  are  charged 
what  the  traffic  will  bear,  they  pay  it  to  the  railroad  direct. 
If  they  furnish  a  subsidy,  they  pay  it  via  the  public 
treasury.  Neither  way  is  very  satisfactory,  but  in  the 
United  States  at  any  rate  we  have  found  the  second  the 
worse  evil  of  the  two. 

To  offset  these  arguments  it  is  urged  that  the  rolling 
stock  is  more  fully  utilized  under  the  Prussian  system,  and 
that  there  is  less  waste  of  capital,  because  the  new  con¬ 
struction  is  intelligently  adapted  to  the  needs  of  the 
country ;  and  that  both  of  these  causes  greatly  reduce  the 
cost  of  railroad  service.  Neither  point  is  fully  made  out. 
The  state  roads  undoubtedly  manage  to  use  a  large  per¬ 
centage  of  available  car  space.  It  is  by  no  means  clear 
that  they  secure  the  same  economy  in  time.  They  load 
cars  quite  fully,  but  they  seem  to  keep  them  idle  a  long 
time  to  do  it.1  In  the  second  point,  concerning  new  com 

1  In  Belgium  the  complaints  under  this  head  are  very  serious.  Cars  lie 
waiting  for  a  load  at  one  point,  and  are  not  to  be  had  at  other  points  where 
they  are  wanted. 


252 


RAILROAD  TRANSPORTATION. 


struction,  there  is  much  more  force  ;  a  force  which  is  never¬ 
theless  weakened  by  two  considerations :  First,  the  state  is 
of  necessity  slow  in  appreciating  the  business  importance 
(as  distinct  from  the  political  importance)  of  new  lines, 
and  thus  makes  financial  mistakes.  Second,  it  is  rare  that 
the  state  does  not  have  to  pay  more  for  a  given  piece  of 
work  than  would  be  paid  by  a  well-managed  private 
company. 

This  brings  us  to  the  political  dangers  of  the  state  rail¬ 
road  system.  These  have  been  most  forcibly  felt  in  Italy, 
as  detailed  in  the  report  of  the  Investigating  Commission. 
If  we  may  believe  M.  le  Hardy  de  Beaulieu,  an  excellent 
authority,  the  same  troubles  are  making  themselves  felt  in 
Belgium.  In  Prussia  there  is  little  or  no  complaint.  This 
is  chiefly  due  to  the  superb  organization  of  the  Prussian 
civil  service.  But  the  possible  dangers — dangers  which 
would  be  realized  under  a  less  stable  government  than 
that  of  Prussia — may  be  inferred  from  the  number  of 
officials  employed  in  railroad  service.  Not  counting  mere 
laborers,  incidentally  employed,  the  number  of  Prussian 
railroad  officials  is  about  80,000.  There  is  little  need 
of  dwelling  upon  the  evils  which  would  arise  from  this 
cause,  were  such  a  system  applied  in  the  United  States. 

To  sum  up  :  The  arguments  advanced  by  the  advocates 
of  government  ownership  start  from  the  idea  that  govern¬ 
ment  means  of  transportation  will  be  managed,  not  with 
a  view  to  high  profits,  but  for  the  good  of  the  community. 
They  will  thus,  it  is  said,  offer  low  rates,  based  upon  cost 
of  service,  and  equal  facilities  without  discrimination. 
The  evils  of  speculation  will  be  avoided.  There  will  be 
no  waste  of  capital,  no  construction  of  two  lines  where 
but  one  is  needed.  Capital  will  be  put  where  it  will  do 
the  most  good  for  the  development  of  the  country. 


RESULTS  OF  STATE  MANAGEMENT. 


253 


Finally,  we  shall  no  longer  be  at  the  mercy  of  combina¬ 
tions  of  capitalists  who  manipulate  and  tax  us  for  their 
own  interests.  It  is  further  urged  that  the  post-office 
shows  how  government  secures  to  all  men  low  rates, 
equal  facilities,  and  security  against  extortion  ;  and  it  is 
claimed  that  the  same  result  might  be  secured  with  a  gov¬ 
ernment  telegraph,  or  perhaps  with  government  railroads. 

On  the  other  hand,  the  Italian  Commission  sums  up 
the  arguments  on  the  other  side  by  saying,  first,  that  it  is 
a  mistake  to  expect  lower  rates  or  better  facilities  from 
government  than  from  private  companies.  The  actual 
results  are  just  the  reverse.  The  state  is  more  apt  to  tax 
industry  than  to  foster  it ;  and  when  it  attempts  to  tax 
industry,  it  is  even  less  responsible  than  a  private  com¬ 
pany.  Second,  state  management  is  more  costly  than 
private  management,  and  a  great  deal  of  capital  is  thus 
wasted.  Third,  political  considerations  are  brought  into 
a  system  of  state  management  in  a  way  which  is  disastrous 
to  legitimate  business  and  demoralizing  to  politics. 

These  conclusions  are  of  the  highest  importance  ;  but 
they  apply  to  some  forms  of  industry  far  more  than  to 
others.  Where  uniform  rates  are  vastly  more  important 
than  low  ones,  the  evils  of  taxation  are  lessened.  Where 
there  is  no  large  investment  of  capital,  there  is  less  dan¬ 
ger  of  waste.  Where  the  business  is  largely  a  matter  of 
routine,  the  opportunities  for  political  manipulation  are 
reduced  to  a  minimum. 

The  conditions  which  favor  state  ownership  and  man¬ 
agement  of  transportation  agencies  are  thus  stated  by 
Adolph  Wagner,1  of  Berlin,  the  leader  of  the  German  pro¬ 
fessorial  socialists:  1.  When  the  efficiency  of  the  ser- 

1  “  Finanzwissenschaft,”  section  15.  See  Lalor  :  “Cyclopaedia  of  Pol. 
Economy,”  article  “  Transportation,”  p.  931. 


I 


254  RA ILROA D  TRA NSPOR  TA  TIORr. 

vice  requires  uniform  and  wide  extension  over  the  whole 
country  and  international  communications  (post-office, 
telegraph  ;  somewhat  less  so  in  the  case  of  railroads).  2. 
When  the  service  involves  any  thing  like  a  monopoly, 
legal  or  actual  (railroads,  telegraphs).  3.  When  it  requires 
constant  repetition  of  the  same  services,  according  to  fixed 
schedules,  in  such  numbers  as  to  involve  the  existence  of 
a  large  body  of  officials.  4.  When  the  cost  may  be  less¬ 
ened  by  combining  a  variety  of  services  at  small  stations 
(letter  and  parcels  post,  railroad  stations,  and  telegraph 
offices).  5.  When  the  service  in  private  management  can 
only  be  secured  by  subsidies  on  a  large  scale.  6.  When  it 
is  necessary  on  grounds  of  public  policy  that  the  service 
should  inure  uniformly  to  the  benefit  of  the  whole  people. 
These  principles,  he  concludes,  enable  us  to  speak  de¬ 
cisively  in  favor  of  state  management  in  the  case  of  letter 
post  and  telegraph ;  more  reservedly  in  the  case  of  parcels 
post  and  railways ;  in  the  matter  of  navigation  they  justify 
it  only  in  exceptional  cases. 

On  the  other  hand,  W.  Stanley  Jevons,1  writing  an  im¬ 
partial  opinion,  but,  as  an  Englishman,  averse  to  great 
extension  of  government  activity,  states  the  conditions 
favorable  to  state  management  as  follows :  “  1.  When 
numberless  widespread  operations  can  only  be  efficiently 
connected,  united,  and  co-ordinated  in  a  single,  all-exten¬ 
sive  government  system.  2.  When  the  operations  possess 
an  invariable  routine-like  character.  3.  When  they  are 
performed  under  the 'public  eye  or  for  the  service  of  indi¬ 
viduals  who  will  immediately  detect  or  expose  any  failure 
or  laxity.  4.  Where  there  is  but  little  capital  expendi¬ 
ture,  so  that  each  year’s  revenue  and  expense  account 

1  “On  Government  Control  of  Telegraphs,”  etc.,  1867.  In  “Methods 
of  Social  Reform,”  p.  279. 


RESULTS  OF  STATE  MANAGEMENT. 


255 


shall  represent,  with  sufficient  accuracy,  the  real  commer¬ 
cial  conditions  of  the  department.”  Of  these  principles 
the  fourth  is  one  of  the  highest  practical  importance, 
which  must  be  considered  in  discussing  any  schemes  of 
state  management ;  and  one  which,  under  a  government 
like  that  of  the  United  States  at  present,  must  generally 
be  decisive. 

The  question  is  not  to  be  settled  on  general  theories. 
Each  case  must  be  decided  by  itself.  The  postal  service 
obviously  fulfils  the  conditions  for  successful  government 
management  better  than  other  forms  of  industry.  Rail¬ 
roads  obviously  do  not.  The  telegraph  stands  midway 
between  the  two.  It  involves  far  more  capital  investment 
than  the  postal  service,  and  far  less  than  railroads.  Its 
management  is  less  a  matter  of  routine  than  the  postal 
service,  and  more  so  than  railroad  service. 

If  we  compare  the  telegraph  service  of  the  United 
States,  with  that  of  Great  Britain  or  Switzerland — the 
two  countries  of  Europe  which  show  the  best  results  from 
government  telegraphy — there  is  no  doubt  that  the  aver¬ 
age  rates  with  us,  length  and  distance  being  taken  into 
account,  are  less  than  with  them.  But  for  moderate  dis¬ 
tances  the  cost,  to  a  private  individual,  of  sending  an 
ordinary  message  is,  on  the  whole,  decidedly  less  in 
the  more  advanced  European  countries  than  with  us. 
Concerning  the  amount  of  use  which  is  made  of  the 
telegraph,  we  find  that  the  number  of  messages  a  year, 
per  100  inhabitants,  with  us,  is  slightly  less  than  with 
them ;  the  amount  of  matter  sent  probably  somewhat 
greater  with  us,  and  the  total  telegraph  service,  taking 
distance  as  well  as  matter  into  account,  very  much  greater. 
We  make  more  use  of  the  telegraph ;  but  they  make  more 
general  use.  The  results  would  have  been  much  more  de- 


i 


256  RAILROAD  TRANSPORTATION. 

cidedly  in  our  favor  had  we  made  the  comparison  with 
other  countries  than  Great  Britain  or  Switzerland. 

In  promptness  and  efficiency  of  service  we  probably 
have  a  slight  advantage,  though  this  point  can  hardly 
be  established  by  argument,  and  must  remain,  to  some 
extent,  a  matter  of  individual  opinion.  In  utilizing  new 
methods  we  have  a  distinct  advantage.  Witness  the  ob¬ 
stacles  to  the  introduction  of  the  telephone  in  Great 
Britain.  On  the  other  hand,  any  such  interruption  to 
the  service  as  was  occasioned  by  our  telegraphers’  strike 
in  1883  would  have  been  impossible  in  Europe. 

The  industrial  results  balance  so  closely  that  the  ques¬ 
tion  must  be  decided  on  political  grounds.  Government 
ownership  of  the  telegraph  would  have  one  great  advan¬ 
tage  :  it  would  emancipate  us  from  the  control  of  an 
organization  which  now  has  dangerous  power,  and  whose 
methods  have  not  been  in  all  respects  above  suspicion. 
On  the  other  hand,  we  should  increase  government 
patronage,  in  itself  a  great  evil ;  we  should  have  a  demor¬ 
alizing  item  of  expense  in  our  budgets,  compared  with 
which  star  routes  or  river  and  harbor  improvements 
might  sink  into  insignificance ;  we  should  run  the  risk  of 
having  facilities  granted  and  capital  invested,  not  because 
business  needed  them,  but  because  they  were  demanded 
by  doubtful  states  or  influential  members  of  Congress. 
We  should  place  in  the  hands  of  our  government  an  agency 
which,  especially  in  the  present  critical  conditionof  our  civil 
service,  might  readily  be  used  to  control  political  action. 
Some  of  the  evils  which  have  recently  turned  men’s  minds 
to  the  thought  of  a  government  telegraph,  would  probably 
be  increased  rather  than  lessened  by  the  change.1 


1  In  the  discussions  on  the  subject  twelve  years  ago,  the  best  arguments 
were  those  of  Wm.  Orton  and  D.  A.  Wells  against  government  ownership 


RESULTS  OF  STATE  MANAGEMENT. 


25  7 


Government  ownership  of  the  telegraph  prevailed  in 
Continental  Europe,  because  each  country  was  more  or 
less  of  a  bureaucracy ;  that  is,  the  civil  service  governed 
the  country,  and  was  so  well  organized  that  it  extended 
itself  as  a  matter  of  course.  In  America  the  civil  service 
is  not  so  well  organized,  does  not  govern  the  country,  and 
is  not  allowed  to  extend  itself  as  a  matter  of  course. 
Political  reasons  decided  the  question  in  favor  of  a  govern¬ 
ment  telegraph  in  Europe.  Political  reasons  form  the 
main  ground  against  a  government  telegraph  in  the 
United  States. 

The  present  importance  of  the  telegraph  question  in 
America  has  thrust  the  question  of  state  railroad  owner¬ 
ship  into  the  background.  Every  now  and  then  some  one 
demands  that  the  government  should  have  a  means  of 
controlling  railroad  charges,  either  by  a  system  of  water 
routes  or  by  the  ownership  of  a  few  among  many  com¬ 
peting  railroads.  Neither  of  these  would  meet  the  real 
evils.  It  is  not  general  charges  that  need  regulating,  but 
special  differences.  If  you  have  a  water  route  or  compet¬ 
ing  railroad,  you  will  protect  those  whose  doors  it  passes, 
and  create  differences  in  their  favor  against  those  who  are 
not  thus  situated. 

The  idea  of  government  ownership  of  one  among  sev¬ 
eral  competing  lines  attracted  undue  attention,  owing  to 
its  supposed  success  in  Belgium.  The  earlier  reports  of 
the  Massachusetts  Commission — deservedly  high  authori- 

(Proc.  of  the  Com.  on  Approp.  on  the  Postal  Telegraph,  42  Cong.  3.,  H.  R. 
Mis.  Doc.  73).  Of  the  more  recent  discussion,  some  of  the  most  important 
articles  are:  Hubbard  (for  government  telegraph),  North  Anier.  Rev.,  137, 
pp.  521-535  ;  Green  (against  government  telegraph),  North  Amer.  Rev.,  137, 
pp.  422-434  ;  Means  (against  government  telegraph  on  broader  grounds), 
North  Amer.  Rev.,  139,  pp.  51-66.  The  best  comparative  statistics  are  in 
United  States  Census,  1880,  vol.  iv.,  gen.  folios  805-849. 


258  RAILROAD  TRANSPORTATION. 

ty — favored  the  idea.  But  it  was  never  carried  to  a  suc¬ 
cessful  conclusion  in  Massachusetts ;  and  it  was  aban¬ 
doned  in  Belgium,  the  government  purchasing  a  large  part 
of  the  private  railroads.  The  competition  with  private 
lines  had  been  too  onerous  for  the  Belgian  Government, 
and  had  left  it  too  little  independence  of  action.  The  pri¬ 
vate  lines  regulated  those  of  the  government  rather  more 
than  the  government  regulated  the  private  lines.  Experi¬ 
ence  is  against  the  probability  of  success  in  the  attempt 
on  the  part  of  government  to  regulate  either  railroads  or 
telegraphs  in  this  way.  To  do  anything  efficient,  it  must 
control  not  a  few  lines,  but  the  whole  system. 

There  is  a  strong  popular  feeling,  to  a  large  extent 
unsuspected  by  those  in  authority,  in  favor  of  government 
ownership  of  railroads  as  a  system.  No  one  can  have 
much  to  do  with  the  more  thoughtful  workingmen  with¬ 
out  finding  how  strong  that  feeling  is,  and  what  hopes  are 
based  upon  it.  The  fact  that  the  question  is  not  now 
under  discussion  must  not  blind  us  to  the  fact  that  forces 
are  at  work  which  may  prove  all  but  revolutionary  when 
the  question  actually  does  come  under  discussion.  If 
it  be  true  that  government  railroad  ownership  would  be  a 
most  serious  political  misfortune  for  the  United  States, 
we  must  be  prepared  to  meet  the  danger  with  our  eyes 
open.  Unless  we  are  able  to  face  it  intelligently,  and  to 
show  reason  for  our  action,  the  widespread  feeling  in  its 
favor  will  prove  too  strong  for  us.  It  may  not  come 
for  many  years ;  but  the  lessons  of  the  Granger  move¬ 
ment  show  plainly  enough  what  forces  will  lie  behind  it 

when  it  does  come. 


APPENDIX  I. 


RAILROADS  OF  THE  WORLD,  JANUARY  I,  1884. 


Miles. 

Capital  invested. 

Per  mile. 

America 

Europe 

Asia  .... 
Africa  .... 
Australia 

140,000 

114,000 

II,6oo 

3.400 

6,500 

$8,400,000,000 

13,110,000,000 

775,000,000 

240,000,000 

325,000,000 

$60,000 

115,000 

66,000 

70,000 

50,000 

275,500 

$22,850,000,000 

$83,000 

The  figures  of  cost  commonly  quoted  are  those  of  the  French 
Bulletin  des  Travaux  Publics.  They  are  in  almost  every  case 
too  high.  Neumann-Spallart  “  Uebersichten  1881-2,”  (1884) 
pp.  437>  43^>  makes  the  necessary  corrections  for  Europe, 
but  has  not  done  the  same  for  Asia  and  Australia.  The  figures 
for  Africa  are  very  uncertain. 

The  special  tables  are  based  partly  on  the  Archiv  fur  Eisen- 
bahnwesen ,  Jan.,  1885,  and  partly  on  the  investigations  of  Neu¬ 
mann-Spallart  ;  but  neither  authority  has  been  followed  in 
every  detail. 

It  has  been  almost  impossible  to  obtain  train-mileage  and 
ton-mileage  statistics  with  the  completeness  which  is  necessary 
for  detailed  comparison. 

In  comparing  the  figures  for  the  United  States  with  those 
for  other  countries,  it  should  be  remembered  that  our  rolling 
stock  is  much  heavier  and  larger  than  theirs,  so  that  a  direct 
comparison  of  the  equipment  figures  does  us  injustice.  It 
must  also  be  borne  in  mind  that  the  average  distance  over 


259 


4 


260  railroad  transportation. 

which  each  passenger  or  ton  is  moved  is  far  greater  in  the 
United  States  than  in  Europe. 


Germany 

Gr.  Britain  and  Ireland 

France 

Russia 

Austria  and  Hungary  . 
Italy  . 

Spain  . 

Sweden 
Belgium 
British  India 
United  States 


Length, 
Jan. i, 1884. 

Per  cent, 
increase  in 
5  years. 

Miles  of 
road  to  100 
sq.  miles. 

Miles  of 
road  to 
10,000 
inhab. 

Cost  per 
mile. 

Dollars. 

22,300 

8 

10.6 

4.9 

105,000 

18,600 

5 

15,2 

5-3 

204,000 

18,500 

18 

9- 

4.9 

128,000 

I5,7oo 

7 

0.8 

1.9 

80,000 

12,800 

12 

5-3 

3.4 

105,000 

5.9°° 

13 

5- 1 

2. 

92,000 

5,100 

16 

2.6 

3- 

78,000 

4,000 

14 

2.3 

8.7 

30,000 

2,600 

6 

23.2 

4.8 

132,000 

10,500 

20 

0.7 

0.4 

66,000 

120,000 

43 

3-4 

22.5 

61,000 

Equipc 

Locom. 

nent  per  icx 

Pass.  cars. 

>  miles. 

Freight. 

Pass. 

moved 

(millions). 

Tons 

moved 

(millions). 

Germany  . 

1882 

51 

95 

I,o8l 

224 

198 

Great  Britain  . 

1882 

76 

232 

2,298 

655 

291 

France 

1881 

46 

105 

1,207 

180 

93 

Russia 

1881 

40 

50 

775 

33 

14 

Austria 

1882 

30 

62 

716 

47 

70 

Italy 

1882 

29 

88 

5io 

34 

Ii 

Spain 

1880 

26 

77 

468 

15 

9 

Sweden  . 

1881 

16 

36 

401 

7 

5 

Belgium  . 

1881 

72 

139 

1,840 

57 

37 

British  India 

1S83 

24 

65 

436 

65 

J9 

United  States  . 

1883 

22 

21 

663 

3i3 

400 

APPENDIX  II. 


THEORY  OF  RAILROAD  RATES.1 

The  difficulty  with  most  theories  of  railroad  rates  is  that 
they  are  not  based  on  actual  practice,  but  upon  somebody’s 
preconceived  notions  of  what  that  practice  ought  to  be. 

The  practical  railroad  manager  has  one  general  principle  in 
this  matter.  He  lowers  rates  whenever  he  thinks  it  will  in¬ 
crease  net  earnings — in  other  words,  as  long  as  it  will  increase 
gross  earnings  faster  than  it  increases  operating  expenses. 
Any  theory  which  shall  correctly  represent  American  railroad 
practice,  must  be  based  on  this  principle. 

The  first  thing  to  be  noticed  is  that  it  has  the  form  of  a  dif¬ 
ferential  equation.  The  manager  lowers  rates  until  the  differ¬ 
ential  of  the  gross  earnings  on  a  particular  line  of  traffic 
ceases  to  be  greater  than  (/.  e.,  becomes  equal  to)  the  differen¬ 
tial  of  the  operating  expenses.  Let  us  analyze  this  equation 
into  its  elements. 

The  rate  is  the  independent  variable.  The  volume  of  traffic 
is  a  function  of  the  rate  ;  as  the  rate  diminishes,  the  volume 
usually  increases  and  never  diminishes.  Let  a;  =  the  rate  per 
car-load  for  a  particular  class  of  goods  between  two  given 
points,  and  y  —  the  number  of  car-loads  obtained  at  that  rate. 
The  successive  values  of  y  corresponding  to  successive  reduc¬ 
tions  of  x  will  form  a  traffic  curve  whose  general  form  is  shown 
on  the  following  page. 

1  This  is  simply  carrying  out  in  detail  the  principles  laid  down  on  pages 
109,  no.  It  differs  in  form  from  the  analysis  of  Lardner,  of  De  La  Gour- 
nerie,  or  of  the  Italian  Commission. 


261 


262 


RAILROAD  TRANSPORTATION. 


( tPP't '  is  the  traffic  curve.  A  rate  Ox  gives  a  volume  of 
traffic  of  xP  car-loads ;  a  reduction  of  the  car-load  rate  to 
Ox'  increases  the  number  of  car-loads  to  x' P' .  The  special 
circumstances  which  affect  the  form  of  the  curve  for  different 
lines  of  traffic  will  be  discussed  later.) 


The  rectangle  OP  —  xy  —  the  rate  per  car-load  multiplied  by 
the  number  of  car-loads  obtained,  obviously  represents  the 
gross  earnings  from  this  particular  branch  of  traffic. 

Now  let  c  —  the  expense  of  hauling  each  additional  car-load. 
In  the  long  run  this  will  vary  a  good  deal,  but  for  a  particular 
branch  of  business  at  a  particular  time,  it  will  have  a  tolerably 
determined  average  value,  which  may  be  treated  as  constant. 
What  constitutes  this  additional  expense  is  not  easy  to  de¬ 
termine  on  general  principles.  In  the  long  run  it  would  in¬ 
clude  a  full  share  of  train  and  station  service  accounts,  a  large 
share  of  car  maintenance,  and  a  moderate  share  of  track  main¬ 
tenance  and  general  expenses.  It  is  the  special  expense  of  each 
particular  piece  of  work  as  distinct  from  the  general  expenses 
of  running  the  railroad  as  a  whole. 

Then  cy>  (the  rectangle  OC),  will  represent  the  special  ex¬ 
pense  of  handlings  car-loads  ;  and  (x  —  c)y,  (the  rectangle  cP), 
will  represent  the  profit  in  the  widest  sense  ;  /.  e.,  the  share 
which  this  particular  line  of  business  can  contribute  toward 


APPENDIX. 


263 


the  general  expenses  and  dividends.  It  is  this  rectangle 
which  the  manager  tries  to  make  as  large  as  possible  in  each 
particular  case.  The  question  is,  How  will  a  reduction  in  rates 
affect  this  rectangle  ?  Let  a  reduction  be  made  to  x',  increas¬ 
ing  the  volume  of  traffic  to  y\  the  gross  earnings  to  OP'  and 
the  expenses  to  OC .  The  increase  in  gross  earnings  —  yP'  — 
x' P  —  x'  A y  — y  A  x.  The  increase  in  operating  expenses  =  yC' 
=.  c  Ay.  At  the  point  where  the  former  ceases  to  exceed  the 
latter,  the  differentials  must  be  equal.  Then  xdy  — ydx  —  cdy  j 
or  ( x  —  c)  dy  ■=  ydx.1  The  same  result  might  have  been  ob¬ 
tained  in  another  way.  The  rectangle  cP  =  {x  —  c)  y.  The 
railroad  manager  wishes  to  make  this  a  maximum.  Its  first 
differential  must  therefore  equal  zero.  Then  {x  —  c)  dy  — ydx 
=  o  ;  or  {x  —  c)  dy  =  ydx. 

We  thus  have  an  exact  mathematical  statement  of  the 
principle  from  which  we  started  ;  and  more  than  that,  we  have 
it  in  a  form  which  shows  the  relation  of  the  different  elements 
involved.  We  have  a  general  theory  based  on  a  recognized 
practice  ;  it  only  remains  to  consider  how  this  theory  works  in 
special  cases. 

1.  Rates  as  affected  by  conditions  of  traffic.  The  traffic  curve 
is  to  a  large  extent  independent  of  the  action  of  the  railroad 
manager.  It  depends  upon  general  business  conditions  ;  the 
railroad  manager  tries  to  put  his  rates  at  such  a  point  as  to 
make  the  most  under  those  conditions. 

Each  class  of  articles  has  a  curve  of  its  own.  The  form  of 
the  lower  (right  hand)  end  of  the  curve  depends  mainly  upon 
the  value  of  the  article.  On  cheap  articles  a  high  rate  would 
stop  nearly  all  shipments  ;  that  is,  this  end  of  the  curve  soon 
approaches  the  axis  of  X.  On  articles  of  high  value,  on  the 
other  hand,  the  rates  may  be  placed  quite  high  without  stop¬ 
ping  shipments  ;  the  curve  for  these  extends  far  to  the  right. 

1  For  convenience  of  illustration,  the  differentials  themselves  are  all 
treated  as  positive.  Due  allowance  for  this  is  made  in  the  signs  of  the 

terms. 


264  RAILROAD  TRANSPORTATION ’. 

For  competitive  business  the  curve  is  very  much  like  that  for 
cheap  articles  ;  a  rate  much  above  cost  is  sure  to  destroy  the 
business,  because  it  will  go  by  some  other  route. 

The  upper  end  of  the  curve  does  not  depend  so  much  upon 
value  as  upon  expansiveness  of  supply  and  demand.  Where 
either  of  these  is  limited,  the  curve  soon  approaches  the  axis 
of  Y.  Where  they  both  expand  readily,  the  curve  runs  up  al¬ 
most  perpendicularly.  An  inspection  of  the  figure  is  sufficient 
to  show  why  such  traffic  best  lends  itself  to  reduction  in  rates. 
The  traffic  in  food,  fuel,  and  other  articles  of  common  use  fur¬ 
nishes  the  best  examples  of  this  ;  but  it  is  generally  true  of  the 
long-distance  traffic,  by  which  new  sources  of  supply  are  de¬ 
veloped. 

Thus  the  possibility  of  charging  high  rates  depends  mainly 
on  the  value  of  the  articles  ;  but  the  profitableness  of  making 
large  reductions  depends  on  the  expansiveness  of  the  traffic. 
If  reductions  are  made  on  traffic  which  does  not  expand,  some¬ 
body  else  besides  the  railroad  gets  the  whole  benefit.  Where 
the  supply  can  expand,  but  the  demand  does  not,  the  benefit 
goes  to  the  consumers.  This  is  the  case  in  general  reductions 
of  rates  on  manufactured  articles  where  there  is  no  pool.  If 
the  demand  can  expand  more  readily  than  the  supply,  the  re¬ 
duction  in  rates  goes  into  the  pocket  of  the  producers  or  mid¬ 
dlemen.  This  is  the  case  in  the  milk  traffic. 

2.  Rates  as  affected  by  cost  of  service.  Any  thing  which 
diminishes  the  expense  of  handling  additional  traffic  makes 
it  advantageous  to  reduce  rates  lower  than  would  otherwise 
be  the  case.  For  if,  previously,  xdy  —  ydx  =  cdyt  any  thing 
which  diminishes  c  without  changing  general  business  condi¬ 
tions  will  make  xdy — ydx  >  cdy ;  that  is,  it  will  place  us  at  a 
point  where  further  reductions  in  rates  increase  gross  earnings 
faster  than  they  increase  operating  expenses.  It  is  for  this 
reason  that  rates  based  upon  what  the  traffic  will  beary  in  many 
instances  seem  to  be  based  upon  cost  of  service. 

We  have  thus  far  confined  our  consideration  of  cost  of  ser- 


APPENDIX. 


265 


vice  to  operating  expenses  in  the  narrowest  sense  of  the  word. 
It  is  now  pretty  well  understood  that  fixed  charges  do  not 
directly  affect  rates  ;  nor  do  dividends  affect  them,  except  in  so 
far  as  a  road  which  is  paying  very  high  dividends  may  reduce 
rates  lower  than  it  otherwise  would,  in  order  not  to  tempt  new 
capital  into  the  field.  But  while  fixed  charges  are  not  taken 
into  account  in  making  rates,  the  prospective  traffic  and  rates 
are  (or  ought  to  be)  taken  into  account  before  incurring  fixed 
charges.  The  practical  question  of  chief  importance  is, 
How  far  is  it  worthwhile  to  increase  fixed  charges  for  the 
sake  of  reducing  operating  expenses  ?  To  the  formulation  of 
this  problem  our  mathematical  analysis  readily  lends  itself  ; 
but  as  it  is  simply  a  restatement  of  old  and  well-recognized 
results,  it  is  unnecessary  to  carry  the  matter  out  in  detail. 


4 


INDEX. 


Absentee  ownership,  21,  133 
Accidents,  128 
Accounts,  56-62 

Adams,  C.  F.,  Jr.,  82,  136,  166 
Alsace,  206,  207,  243 
Austria,  18,  208-212,  244-248 

Back-loading,  107,  108 

Balance-sheet,  57-60 

Baltimore  and  Ohio  R.  R.,  1,  32-34, 

94 

Bankrupt  competition,  53,  71-74, 
123 

Belgium,  212-218,  247 
Blanchard,  G.  R.,  82 
Bonds,  52,  53,  148,  156 
Borrowing  power,  54,  149 

Canals,  29-32,  164,  165  (see  Erie 
Canal) 

Capital  investment,  40-43,  101,  148, 
149,  259,  260 
Cars,  106  ;  English,  150 
Charters,  English,  11,  12,  46,  164- 
167  ;  for  limited  periods,  218 
Chicago  roads,  86,  91 
Classification,  112-114,  245  ;  Bel¬ 
gian,  216  ;  German,  244 
Clearing-house,  89;  English,  159-162 
Coal  combination,  68 
Combination,  65,  68,  74-81,  82-99  » 
in  England,  151,  158,  159,  168 
Commercial  crises,  48-56,  167, 168 
Commissions,  State,  1 35-140  ;  Na¬ 
tional,  141-145;  English,  170-177, 
182-184 

Competition,  40,  63-69,  129,  166, 
167,  214-217 

Competitive  rates,  71,  142,  143 
Congressional  legislation,  140-145 
Consolidation,  12,  13,  83-87,  158,168 

267 


Construction  account,  60-62,  233- 
235 

Construction  companies,  52,  21 1 
Cooley,  T.  M.,  81,  97 
Cooperative  freight  lines,  88-90 
Corporate  ownership,  42-48 
Cost  of  railroads,  101,  102  ;  English, 
155;  comparative  statistics,  260 
Cost  of  service,  no,  112,  129,  130, 
184,  240-246,  249-251 
Crisis  of  1884,  50-56 

Differentials,  95-98 
Discrimination,  20,  21,  IOI,  102,  108- 
125,  132,  133,  142,  143,  242,  247; 
in  England,  180-186;  in  Germany, 
246-248 

Diversion  of  freight,  76 
Dividends,  sum  available  for,  58,  61 ; 
limitation  of,  101-103,  126,  179 

England,  3,  4,  146-186 
Equipment,  statistics  of,  260 
Erie  Canal,  12,  29-32,  98 
Erie  Railway,  35,  85,  86,  86,  90,  94 
European  railroad  statistics,  260 
Eveners,  95 

Expenses,  56-61,  105-108,  no,  142, 
143,  217,  233,  234 
Express  companies,  87,  149,  150 

Fast-freight  lines,  87-90 
Fink,  Albert,  82,  93,  96,  100 
Fixed  charges,  70-74,  265 
Floating  debt,  57,  6 1 
Foreclosure,  53 
France,  3,  187-202 
Free  passes,  109 

General  railroad  law,  125 
Germany,  203-208,  239-252 


268 


RA ILROAD  TRA  NSPOR  TA  TION. 


Government  control,  22,  125-145, 
200,  201  ;  ownership,  189,  195, 
196,  205-208,  211-220,  225-231, 
236-255,  258  ;  ownership  of  tele¬ 
graph,  255-257 

Granger  cases,  42  ;  movement,  130- 
136 

Hepburn  Committee,  82,  96 

Insolvent  roads,  53,  71,  74 
Internal  improvements,  27 
Inter-State  commerce,  140-145 
Iowa  Commission,  13 1,  132,  139 
Italy,  219-235 

Joint  executive  committee,  96 
Joint-stock  ownership,  44-48 

Labor  combinations,  78,  128 
Land  grants,  37,  38 
Liability,  43,  127,  128 
Limitation  of  construction,  54 ;  of 
profits,  55,  102,  126,  156,  179 
Local  discrimination,  114-119,  122, 
132,  137,  I38.  I4I»  142,  246-248 
Locomotives,  10,  33,  107 

Massachusetts  railroads,  35  ;  Com¬ 
mission,  56,  62,  136-139,  215 
Maximum  rates,  129,  134,  178,  179 
Military  railroads,  15 
Mississippi  River,  28,  29,  93,  96, 
98  ;  valley,  railroads  in,  36,  38 
Monopoly,  63-69,  77,  191,  192,  200, 
204,  240  • 

National  commission,  141-145 
New  York  Central,  35,  83,  93~99. 
103,  121,  129 

New  York,  commerce  of,  94 
New  York  State,  Assembly  Com. 
(1879),  82,  96  ;  early  railroad  his¬ 
tory,  35 

Pacific  railroads,  38,  39 
Parallel  roads,  53,  54 
Passenger  business,  109 
Passes,  109 

Pennsylvania,  canals,  31  ;  early  rail¬ 
roads,  32,  34 

Pennsylvania  R.  R.,  84,  85,  93 


Personal  discrimination,  20,  hi, 
119-123,  182,  183 

Political  influence,  229,  238,  252,  256 
Pools,  causes  and  forms  of,  74“76  ; 
in  America,  91-97.  *43.  x44l 
Europe,  81,  151,  159,  216,  249 
Post-office,  3,  5,  6,  241,  254,  255 
Profits,  77,  101-104  ;  in  France,  199 
Pro-rata  law,  129,  131 
Prussia,  204-208,  247-249,  25 1,  252 
Publicity  of  management,  138 

Rails,  17,  33.  105.  106 
Rates,  Chicago-N.  Y.,  93  ;  Chica¬ 
go— Liverpool,  98  ;  competitive, 
71,  239;  in  Belgium,  215,  216; 
in  England,  157,  158;  in  France, 
201,  202  ;  in  Germany,  242-251  ; 
on  government  railroads,  229, 
241,  245,  253  ;  in  the  U.  S., 
reduction  in,  104-108  ;  to  develop 
busines,  16,  17  ;  reasonable,  131- 
134 ;  theory  of,  109,  III,  245, 
246,  250,  261-265 
Reagan  bill,  140,  141 
“Reasonable”  rates,  119,  13L  *34i 

144 

Rebates,  119,  120,  185 
Receivers,  53,  71 
Regulation,  right  of,  41,  42,  140 
Roads,  2,  3,  24-28 
Russia,  218,  237 

Scott,  Thomas  A,  84,  85 
Seaboard  cities,  94-98 
Secrecy  of  rates,  119,  120,  183 
Shipping,  4,  7,  45 
Short-haul  principle,  140-142,  183 
Sleeping  cars,  87 
Socialism,  79,  80,  258 
Southern  railroads,  34,  35,  87; 

Railway  &  S.  S.  Association,  92, 
93  ;  State  legislation,  136 
Special  rates,  119,  121,  182,  214 
Speculation,  19,48-56,  99,  149,  167, 
194,  205,  21 1 

Standard  Oil  Co.,  67,  95,  121 
State  control,  22,  129-145,  200,  201 ; 
ownership,  34,  189,  195,  I9^»  2°5. 
208,  211,  218,  219,  225-231,  236- 
258  ;  ownership  of  telegraph,  255- 
257 


INDEX.  269 


Statistics,  comparative,  154,  259,  260 
Steamships,  8,  9,  64,  68,  69 
Steel  rails,  105,  106 
Stephenson,  George,  10,  66 
Sterne,  Simon,  97,  100 
Stock-watering,  54,  55,  102,  122,  155 
Strikes,  128 

Subsidies,  26,  31,  34-38,  188,  190, 
204,  209,  220,  241,  251 

Taxation,  126,  127,  241 
Telegraph,  6,  7,  236,  254-258 
Through  business,  87,  93,  202 
Transcontinental  railroads,  39,  86 
Transportation  companies,  87,  88 


Trunk-line  systems,  84,  85  ;  pools, 

93-97 

Turnpikes,  25-28 

Vanderbilt  system,  83-85 

Wars  of  rates,  93-99,  1T4,  214,  248 
Water  in  stock,  54,  55,  101,  102, 
Water  routes,  28-32 ;  competition 
with,  93-98,  ]8o,  181,  214,  248 
“West  Shore,”  86,  99,  103 
What  the  traffic  will  bear,  17,  76, 
hi,  123,  124,  245-247,  263,  264 
Wisconsin  legislation,  135 


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